Abstract

http://ssrn.com/abstract=1612407
 
 

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Finding the Tipping Point - When Sovereign Debt Turns Bad


Mehmet Caner


North Carolina State University - Department of Economics

Thomas J. Grennes


North Carolina State University - Department of Economics

Friederike (Fritzi) N. Köhler-Geib


The World Bank

May 20, 2010


Abstract:     
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 99 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.

Number of Pages in PDF File: 17

Keywords: Threshold, growth costs, long-run average debt

JEL Classification: F34, F30

working papers series


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Date posted: May 21, 2010  

Suggested Citation

Caner, Mehmet and Grennes, Thomas J. and Köhler-Geib, Friederike (Fritzi) N., Finding the Tipping Point - When Sovereign Debt Turns Bad (May 20, 2010). Available at SSRN: http://ssrn.com/abstract=1612407 or http://dx.doi.org/10.2139/ssrn.1612407

Contact Information

Mehmet Caner
North Carolina State University - Department of Economics ( email )
Raleigh, NC 27695-8110
United States
Thomas J. Grennes
North Carolina State University - Department of Economics ( email )
4110 Nelson
Raleigh, NC 27695-8110
United States
919-513-2881 (Phone)
919-515-6268 (Fax)
HOME PAGE: http://www.ag-econ.ncsu.edu/faculty/grennes/PubsGrennes.htm
Fritzi N. Koehler-Geib (Contact Author)
The World Bank ( email )
1818, H Street, NW
Washington, DC 20433
United States
+1(202) 458 1716 (Phone)
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