Debt Overhang or Debt Irrelevance?

By T. Cordella, Luca A Ricci, Marta Ruiz-Arranz. 2010

120 citations recorded by the source corpus.

Do highly indebted countries suffer from a debt overhang? Can debt relief foster their growth rates? To answer these important questions, this article looks at how the debt-growth relation varies with indebtedness levels, as well as with the quality of policies and institutions, in a panel of developing countries. The main findings are that, in countries with good policies and institutions, there is evidence of debt overhang when the net present value of debt rises above 20–25 percent of GDP; however, debt becomes irrelevant above 70–80 percent. In countries with bad policies and institutions, thresholds appear to be lower, but the evidence of debt overhang is weaker and we cannot rule out that debt is always irrelevant. Indeed, in such countries, as well as in countries with high indebtedness levels, investment does not depend on debt levels. The analysis suggests that not all countries are likely to profit from debt relief, and thus that a one-size-fits-all debt relief approach might not be the most appropriate one.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/de2423f7b5d733c97c00e06c7b079cd735948ff9

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In Economics and Econometrics

1. A. Presbitero
2. M. Eberhardt
3. Balázs Égert

In Finance

1. A. Presbitero
2. M. Eberhardt

Citations in the corpus

• Public debt and growth: Heterogeneity and non-linearity (2015, background): “Given the recent interest in this topic, cross-country empirical papers that are closely related to our work include Cordella et al. (2010), Checherita-Westphal and Rother (2012), Kourtellos et al. (2013), Panizza and Presbitero (2014), among others.”