What Are the Channels Through Which External Debt Affects Growth?
IMF Working Papers, January 1, 2004
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Bibliographic details
- Authors: Hélène Poirson, Luca A Ricci, Catherine A Pattillo
- Published: January 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451843293.001
Research question and scope
- Investigates whether debt affects growth through factor accumulation or total factor productivity growth.
- Tests for the presence of nonlinearities in the effects of debt on different sources of growth.
- Sample: a large panel dataset of 61 developing countries over the period 1969-98.
Methodology
- Growth-accounting framework distinguishing contributions from physical capital accumulation and total factor productivity (TFP) growth.
- Empirical approach includes 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.
- Tests compatibility with a simultaneous significant effect of growth on debt ratios (as suggested by Easterly (2001)).
Key findings and quantitative results
- The negative impact of high debt on growth operates both through:
- A strong negative effect on physical capital accumulation.
- A strong negative effect on total factor productivity growth.
- Average quantitative effects for high-debt countries:
- Doubling debt will reduce output growth by about 1 percentage point.
- Doubling debt will reduce both per capita physical capital growth and total factor productivity growth by somewhat less than 1 percentage point.
- Contribution decomposition:
- Approximately one-third of the effect of debt on growth occurs via physical capital accumulation.
- Approximately two-thirds of the effect of debt on growth occurs via total factor productivity growth.
Robustness and sensitivity
- Results are generally robust to the use of alternative estimators addressing unobserved country-specific effects and endogeneity.
- Findings are compatible with a simultaneous significant effect of growth on debt ratios.
Subject areas and keywords (as stated in the paper)
- Subjects: Capital accumulation, Human capital, Labor, National accounts, Production, Production growth, Productivity, Total factor productivity.
- Keywords: Africa, Asia and Pacific, Capital accumulation, debt coefficient, debt impact, debt level, debt threshold, debt variable, debt-overhang effect, external debt, Global, Growth, growth accounting, Human capital, Laffer curve, Middle East, physical capital, Production growth, Productivity, stock ratio, Sub-Saharan Africa, threshold d, Total factor productivity, WP.
Hélène Poirson, Luca A Ricci, and Catherine A Pattillo, "What Are the Channels Through Which External Debt Affects Growth?", IMF Working Papers 2004, 015 (2004), January 1, 2004.