Finding the Tipping Point - When Sovereign Debt Turns Bad
By Mehmet Caner, T. Grennes, Fritzi Koehler-Geib. 2010
286 citations recorded by the source corpus.
Public debt has surged during the current global economic crisis and is expected to increase further. This development has raised concerns whether public debt is starting to hit levels where it might negatively affect economic growth. Does such a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? What happens if debt stays above this threshold for an extended period of time? The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 101 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points. The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/e21fde1aece871827943b1ca9cf896b992f72ec3
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Citations in the corpus
- Robust inference for threshold regression models (2017, methodology): “This is the unconstrained LSE and for comparison we also describe the continuity constrained least squares estimator (CLSE), which minimizes (5) under Assumption C in the next section, e ✓ = e ↵0, e 0 := argmin ✓2⇥: 1+ 3 =0; 2=0 Sn (✓) .”
- Regression Kink With an Unknown Threshold (2017, methodology): “Recalling definition (2) we have the simple bound k()k(2) = 0 + (− )2 ≤ kk(2)+ (2) + 2 Then by the and Cauchy-Schwarz inequalities,”
- Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies (2012, unknown): “7 Kumar and Woo (2010), Cecchetti et al. (2011), Baum, Checherita and Rother (2013) and Caner, Grennes, and Koehler-Geib (2010) find that beyond a certain threshold—about 75-95 percent of GDP—higher public debt lowers potential growth.8 Italy and Japan, two high-debt/low-growth countries, are good e”