European Parliament Library

Is There a Debt-threshold Effect on Output Growth?, Alexander Chudik, Kamiar Mohaddes, M. Pesaran, Mehdi Raissi

Abstract
This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965- 2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers in the long run
Language
eng
Literary Form
non fiction
Note
"IMF working papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF working papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management."
Physical Description
1 online resource (60 pages), color illustrations.
Specific Material Designation
remote
Form Of Item
online
Isbn
9781513542812

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