Threshold Effects of Sovereign Debt: Evidence From the Caribbean

Lisa Drakes, Chrystol Thomas, Roland Craigwell and Kevin Greenidge

No 2012/157, IMF Working Papers from International Monetary Fund

Abstract: This paper addresses the issue of threshold effects between public debt and economic growth in the Caribbean. The main finding is that there exists a threshold debt to gross domestic product (GDP) ratio of 55–56 percent. Moreover, the debt dynamics begin changing well before this threshold is reached. Specifically, at debt levels lower than 30 percent of GDP, increases in the debt-to-GDP ratio are associated with faster economic growth. However, as debt rises beyond 30 percent, the effects on economic growth diminishes rapidly and at debt levels reaching 55-56 percent of GDP, the growth impacts switch from positive to negative. Thus, beyond this threshold, debt becomes a drag on growth.

Keywords: WP; real GDP; least squares; percentage point; Debt Problems; Debt Threshold; Panel Data; Threshold Regressions; threshold estimation technique; growth rate; GDP ratio; growth-reducing effect debt; CARICOM government; threshold debt regression; debt variable; debt level; government spending; GDP cost; threshold estimation techniques of Hansen; Threshold analysis; Fiscal stance; Caribbean (search for similar items in EconPapers)
Pages: 23
Date: 2012-06-01
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Citations: View citations in EconPapers (18)

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Working Paper: Threshold Effects of Sovereign Debt: Evidence from the Caribbean (2012)
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