What Are the Channels Through Which External Debt Affects Growth?

Hélène Poirson, Luca Ricci and Catherine Pattillo

No 2004/015, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the channels through which debt affects growth, specifically whether debt affects growth through factor accumulation or total factor productivity growth. It also tests for the presence of nonlinearities in the effects of debt on the different sources of growth. We use a large panel dataset of 61 developing countries over the period 1969-98. Results indicate that the negative impact of high debt on growth operates both through a strong negative effect on physical capital accumulation and on total factor productivity growth. On average, for high-debt countries, doubling debt will reduce output growth by about 1 percentage point and reduce both per capita physical capital and total factor productivity growth by somewhat less than that. In terms of the contributions to growth, approximately one-third of the effect of debt on growth occurs via physical capital accumulation and two-thirds via total factor productivity growth. The results are generally robust to the use of alternative estimators to control (to different extents) for biases associated with unobserved country-specific effects and the endogeneity of several regressors, particularly the debt variables. In particular, the results are shown to be compatible with a simultaneous significant effect of growth on debt ratios, as suggested by Easterly (2001).

Keywords: WP; debt variable; stock ratio; debt impact; debt level; Laffer curve; physical capital; threshold d; Growth; external debt; growth accounting; debt-overhang effect; debt threshold; debt coefficient; Total factor productivity; Productivity; Human capital; Capital accumulation; Production growth; Global; Middle East; Sub-Saharan Africa; Africa; Asia and Pacific (search for similar items in EconPapers)
Pages: 34
Date: 2004-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (176)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=17021 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2004/015

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().