## Is There a Debt-threshold Effect on Output Growth?

_IMF Working Papers, September 8, 2015_

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## Bibliographic details
- Authors: Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran, Mehdi Raissi
- Published: September 8, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513513355.001

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### Summary
- This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness.
- Contribution is both theoretical and empirical.
- Using data on a sample of 40 countries (grouped into advanced and developing) over the 1965- 2010 period, the authors find:
  - No evidence for a universally applicable threshold effect in the relationship between public debt and economic growth once the impact of global factors and their spillover effects are accounted for.
  - Regardless of the threshold, significant negative long-run effects of public debt build-up on output growth.
  - Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers in the long run.

### Theoretical contribution
- Develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors.
- Illustrate via Monte Carlo experiments that the proposed tests perform well in small samples.

### Empirical findings
- Sample: 40 countries (grouped into advanced and developing).
- Time coverage: 1965- 2010 period.
- Key empirical results:
  - No universally applicable debt threshold affecting output growth after controlling for global factors and spillovers.
  - Significant negative long-run effects of public debt accumulation on output growth irrespective of threshold specification.
  - Evidence that a downward trajectory of public debt allows high-debt countries to achieve long-run growth comparable to peers.

### Policy implications and interpretation
- Public debt build-up has materially negative long-run effects on output growth.
- Debt trajectory matters: reducing public debt can enable convergence in long-run growth rates with lower-debt peers.
- Accounting for global factors and spillover effects is crucial when assessing debt-growth relationships and searching for threshold effects.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/is-there-a-debt-threshold-effect-on-output-growth-43260_