"Finding the Tipping Point -- When Sovereign Debt Turns Bad"
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 t...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100730091629 http://hdl.handle.net/10986/3875 |
| Summary: | 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. |
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