WPS5391
Policy Research Working Paper 5391
"Finding the Tipping Point--When
Sovereign Debt Turns Bad"
Mehmet Caner
Thomas Grennes
Fritzi Koehler-Geib
The World Bank
Latin America and the Carribean Region
Economic Policy Sector
July 2010
Policy Research Working Paper 5391
Abstract
Public debt has surged during the current global a threshold of 77 percent public debt-to-GDP ratio. If
economic crisis and is expected to increase further. This debt is above this threshold, each additional percentage
development has raised concerns whether public debt point of debt costs 0.017 percentage points of annual real
is starting to hit levels where it might negatively affect growth. The effect is even more pronounced in emerging
economic growth. Does such a tipping point in public markets where the threshold is 64 percent debt-to-GDP
debt exist? How severe would the impact of public debt ratio. In these countries, the loss in annual real growth
be on growth beyond this threshold? What happens if with each additional percentage point in public debt
debt stays above this threshold for an extended period of amounts to 0.02 percentage points. The cumulative
time? The present study addresses these questions with effect on real GDP could be substantial. Importantly, the
the help of threshold estimations based on a yearly dataset estimations control for other variables that might impact
of 101 developing and developed economies spanning a growth, such as the initial level of per-capita-GDP.
time period from 1980 to 2008. The estimations establish
This paper--a product of the Economic Policy Sector, Poverty Reduction and Economic Management in Latin America
adn the Carribbean Region--is part of a larger effort in the department to understand the impact of indebtedness on
economic growth. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author
may be contacted at fkoehler@worldbank.org.
The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
Produced by the Research Support Team
"Finding the Tipping Point - When Sovereign Debt Turns Bad"
Mehmet Caner, North Carolina State University, Thomas Grennes, North Carolina State
University, Fritzi Koehler-Geib, World Bank1
The authors may be contacted at mcaner@ncsu.edu, tom_grennes@ncsu.edu, and fkoehler@worldbank.org
(corresponding co-author).
This paper was prepared for the Debt Management Facility Stakeholders Forum in Tunis, March 29-30 2010,
and is forthcoming in "Sovereign Debt and the Financial Crisis," eds. Carlos A. Primo Braga and Gallina A.
Vincelette. World Bank. 2010.
1
Mehmet Caner and Thomas Grennes are from North Carolina State University, and Fritzi KoehlerGeib an Economist at the
World Bank. The views expressed in this paper are those of the authors and do not necessarily represent the views of the World
Bank Group, its Board of Executive Directors, or the countries they represent. The authors thank the anonymous reviewers for
their insightful comments and suggestions on an earlier draft of this paper, as well as for comments received from participants
at the World BankAfDB Debt Management Conference in Tunis in March 2010 where this paper was presented. We have tried
to duly incorporate them in this version of the paper. This paper was prepared for the Debt Management Facility Stakeholders
Forum in Tunis, March 2930 2010, and is forthcoming in "Sovereign Debt and the Financial Crisis," eds. Carlos A. Primo Braga
and Gallina A. Vincelette. World Bank. 2010. The authors would like to thank Rodrigo Chaves and Zafer Mustafaoglu for very
helpful comments and support and Gallina Vincelette for very helpful suggestions.
1
I. Introduction
Public debt has increased substantially for countries at all income levels as a result of the current global
economic crisis. Historical evidence indicates that increases in debt persist for years following financial
crises (Reinhart and Rogoff 2010; Scott 2010). In addition, projections of standard measures of public
debt relative to GDP for the next 30 years indicate that debt levels are unsustainable for many countries
(Cecchetti, Moharty, and Zampolli 2010). Taking account of the implicit public debt associated with
social security, medical care, and contingent liabilities would reveal a substantially magnified debt
problem (Cecchetti, Moharty, and Zampolli 2010).
The increase in public debt has raised concerns over whether it is starting to hit levels at which it might
slow economic growth. Does such a "tipping point" exist? How strong would the growth impact be if
debt surpassed the threshold? What would happen if debt stayed at elevated levels for an extended period
of time?
According to Reinhart and Rogoff (2010), the answer to the first question is "yes." Using histograms
summarizing evidence from 44 developed and developing economies, they find a threshold of 90 percent
central government debt to GDP, after which the real growth rate declines. This threshold has received
considerable attention in the press, which has referred to it as a "tipping point" (Pozen 2010). The
threshold has practical significance, because the United States and many other countries have either
reached this point or are projected to reach it soon and remain above it for years.
If debt thresholds exist, there are theoretical and empirical reasons why they might vary by country
income. Debt may play out differently in low-income countries, because of less developed domestic
financial markets; a different degree of openness (Frankel and Romer 1999; Levine and Renelt 1992); and
different institutions (Acemoglu and others 2003; Alfaro and others 2008). Debt levels in low-income
countries may also have different implications for growth through the inflation channel. Governments in
countries without well-developed bond markets have resorted to monetizing government debt by selling
bonds to their central banks. As a result, empirical studies have found a connection between fiscal deficits
and inflation in low-income countries but no systematic connection in high- income countries (Catao and
Terrones 2005; Pattillo, Poirson, and Ricci 2002).
This article analyzes thresholds in long-term average public debt to GDP ratios and the differential impact
of debt on long-term GDP growth below and above such a threshold. It relies on estimates first introduced
by Hansen (1996, 2000) and takes into account country characteristics such as initial GDP, inflation, and
trade openness.
The analysis contributes to the literature by providing an econometrically rigorous analysis of the impact
of long-run average public debt to GDP ratios on long-run average growth rates. It differs from the
literature in three significant ways. First, the literature focuses primarily on the nexus between external
debt and growth (see, for example, Cordella, Ricci, and Ruiz-Arranz 2010; Pattillo, Poirson, and Ricci
2002, 2004). In contrast, this chapter analyzes the nexus between total public debt and growth. Second,
other studies (Cordella, Ricci, and Ruiz-Arranz 2010; Pattillo, Poirson, and Ricci 2002, 2004; and
2
Reinhart and Rogoff 2010) investigate the short-run effect of external debt on growth. In contrast, this
analysis emphasizes the long-run relationship. Third, this analysis uses a different methodology to
provide the core findings. In contrast to previous studies, which relied on spline functions (Cordella,
Ricci, and Ruiz-Arranz 2010; Pattillo, Poirson, and Ricci 2002, 2004) or histograms (Reinhart and Rogoff
2010), this analysis relies on the threshold estimation techniques developed by Hansen (1996, 2000).1
The chapter is organized as follows. The next section, section II, describes the data. The third section
describes the methodology. The fourth section presents the results. The last section provides some
concluding remarks.
II. Data
The analysis is based on a data set of 101 countries (75 developing and 26 developed), consisting of
annual observations for the period 19802008 (countries are listed in the annex). By including a large
group of both developing and developed countries, this data set improves on previous data sets.2
The main variables are gross public debt, GDP growth, and a set of control variables known to influence
economic growth (table 1). Public debt is measured as the ratio of general government gross debt to GDP.
When considering the debt-growth nexus, debt at all levels of government is relevant, because it
influences the government's ability to engage in growth-enhancing potentially countercyclical policies.
The average debt to GDP ratio was 67.1 percent for the entire sample (59.9 percent for high-income
countries). Average GDP growth was 3.8 percent for the entire sample (2.6 percent for high-income
countries).
Table 1: Data Sources
Variable Time series Data Source
Real GDP growth GDP (constant 2000 dollars) World Development Indicators
(World Bank)
Public debt General government, gross debt, World Economic Outlook (IMF)
GDP (current dollars)
Openness Imports of goods and services (current dollars) World Development Indicators
Exports of goods and services (current dollars) (World Bank)
GDP (current dollars)
Inflation Consumer price index World Economic Outlook (IMF)
Initial GDP GDP per capita in 1970 (constant 2000 dollars) World Development Indicators
(World Bank)
Source: Authors.
3
III. Methodology
The main results of the analysis draw on a threshold least squares regression model following Hansen
(1996, 2000). We also use pooled least squares regressions, to relate our findings to those of Reinhart and
Rogoff (2010). The description of the methodology here focuses on the threshold estimation technique
(we do not account for potential endogeneity in the regressions).
Threshold estimation is used because it is superior to other techniques that have been used to estimate a
nonlinear function. It allows one to identify the threshold level, its significance, the coefficients of the
different regimes, and their significance simultaneously from the data based on a solid theory.
III.1. Threshold Regression Model
The specification of the threshold LS regression model is as follows:
Y i 0 ,11{ X i } 0 , 2 1{ X i } 1,1 X i 1{ X i } 1, 2 X i 1{ X i }
(1)
2 ,1Wi 1{ X i } 2 , 2Wi 1{ X i } u i
where 1 represents an indicator function that takes the value of one when the event inside
happens, otherwise zero. Y represents the long run average real growth rate and X represents the
long run average public debt-to-GDP ratio. W represents control variables. "i" is a country index.
The unknown threshold value as well as the coefficients 0,1 through 2, 2 are estimated with
the threshold LS method of Hansen (2000). Note that equation (1) can be rewritten in two
equations, where the first represents the regime below the threshold and the second the regime
above the threshold:
Y i 0 ,1 1,1 X i 2 ,1Wi u i , if Xi
Y i 0 , 2 1, 2 X i 2 , 2Wi u i , if Xi
A more specific methodology would be to set thresholds on selected control variables. Here
however, we start from a more general specification with two separate regimes, as described in
equation (1).
III.2 Test for Threshold
We test for a threshold in the relationship between the long-run average public debt to GDP ratio (1980
2008) and long-run average growth to verify the model in equation (1). The null hypothesis is that the
4
slope coefficients and intercepts are identical in the two regimes. In equation (1) this means that by using
a heteroskedasticity-consistent Lagrange multiplier test (Hansen 1996), we test the following null
hypothesis:
H 0 : 0,1 0, 2 , 1,1 1, 2 , 2,1 2, 2 (2)
If there is no threshold, expression (2) will not be rejected, and a simple least squares model can be
estimated. If there is a threshold effect, equation (1), including the unknown threshold value of , is
estimated. Bootstrap p-values are used for this purpose, because they can replicate the asymptotic
distribution, as Hansen (1996) shows.
IV. Results
Overall, the results suggest that thresholds exist in the relationship between the long-run average public
debt to GDP ratio and long-run GDP growth. They suggest that it is crucial to take into account initial
GDP, that the threshold level differs for developing and developed economies, and that the cost of
surpassing the debt threshold is high over time.
A note of caution on the results relates to potential endogeneity. Long-run average debt may be
endogenous. The focus of the current study is to analyze the relation between long-run average debt and
long-run GDP growth. Due to the interest in this long-run relation, we cannot use the instrumental
variable threshold technique of Caner and Hansen (2004) which relies on short-run averages as
instrument. The use of short-run average debt however, would imply a different research question. We
will tackle the short-term question through panel data analysis in a future project.
However, the present study addresses potential endogeneity in the following way: Estimations are
repeated adding initial debt/GDP (1980) to control for omitted variables bias and reverse causality. The
results remain qualitatively the same with the same threshold values and small changes of the coefficients
in the two regimes.
IV.1 Debt Threshold All Countries
The first main result is that the threshold level of the average long-run public debt to GDP ratio on GDP
growth is 77.1 percent for the entire sample of 79 countries (initial GDP data were not available for 22
countries) (table 2). If debt surpasses this level, each additional percentage point in the ratio of public debt
to GDP costs the economy 0.0174 percentage points in annual average real growth. This effect is highly
significant and quantitatively important. Below this threshold, additional debt increases growth (the
estimated coefficient is 0.065). This result is consistent with the idea that at moderate debt levels, a higher
public debt to GDP ratio may actually imply that credit constraints are looser, and that the economy has
more resources available for investment.
The results are derived from the model in equation (1), first developed by Hansen (1996), when equation
(2) is rejected. We control for the (logarithm of) initial (1970) GDP per capita, inflation, and trade
openness. The test statistic for the Lagrangean multiplier test is 14.21. Because the limit is nonstandard
5
but recoverable by a bootstrap procedure (Hansen 1996), the p-value from 1,000 bootstrap replications is
0.093, significant at the 10 percent level. The coefficients on inflation are insignificant. Trade has a
positive effect on the growth under the high-debt regime, possibly because more credit is available for
trade. Initial GDP per capita coefficients are significant and much higher in low-debt than high-debt
regimes.
Table 2: Threshold Regression, Two Regimes Based on Estimated Threshold Debt Level, Dependent
Variable real average GDP growth
Variables Regime 1: Debt>=77% Regime 2: Debt <77%
Slope Std Error Slope Std Error
Log Initial 0.00006* 0.00001 0.0002* 0.0001
GDP/capita(1970)
Trade Openness 0.0454* 0.0078 -0.0007 0.0012
Inflation 0.0012 0.0007 -0.0244 0.0164
Debt/GDP -0.0174* 0.0010 0.0653* 0.0128
Source: Authors
Note: Note: R^2 for the first regime is 0.985, and for the second regime is 0.987. There are 12 countries in the first
regime, and 67 in the second regime. The 95% confidence interval for the Debt/GDP in Regime 1 is [-0.0195, -
0.0154], for the second regime [0.0402, 0.0905]. These are based on Likelihood ratio test in Hansen (2000). The
95% Confidence Interval for Threshold estimate is [0.770574, 0.770574]. * represents significance at 5% level by
using standard normal critical values as in Hansen (2000).
IV.2 Debt Threshold Excluding Initial GDP
The second main result is that it is crucial to include initial GDP in the estimations. Repeating the
estimations but omitting initial GDP significantly changes the threshold value. The estimated threshold
for the debt to GDP ratio is 97.6 percent (table 3). The impact is small but highly significant and positive.
The results are derived from a Lagrangean multiplier test of equation (3.2). The test statistic for the
Lagrangean multiplier test is 12.75, with a bootstrap p-value from 1,000 bootstrap replications of 0.097,
significant at the 10 percent level. The country sample covers all 99 countries.
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Table 3: Threshold Regression, Two Regimes Based on Estimated Threshold Debt Level, excluding
initial GDP, Dependent Variable real average GDP growth
Variables Regime 1 Debt>=97.6% Regime 2 Debt<97.6%
Slope Std Error Slope Std Error
Trade Openness 0.00007* 0.00001 -0.0005* 0.0001
Inflation 0.0027* 0.0003 -0.0091 0.0103
Debt/GDP -0.0147* 0.0007 0.0805* 0.0069
Source: Authors
Note: R^2 for the first regime is 0.976, and for the second regime is 0.969. There are 11 countries in the first regime,
and 88 in the second regime. The 95% confidence interval for the Debt/GDP in Regime 1 is [-0.0173, -0.0130], for
the second regime [0.0688, 0.0946]. These are based on Likelihood ratio test in Hansen (2000). The 95%
Confidence Interval for Threshold estimate is [0.9074, 1.0441]. * represents significance at 5% level by using
standard normal critical values as in Hansen (2000).
IV.3 Differential Debt Threshold Developing versus Developed Economies
The third main result is that the threshold differs substantially for developing and developed economies.
Repeating the estimations for the subsample of developing countries yields a debt to GDP threshold of 64
percent. Moreover, the negative impact of debt exceeding this threshold is slightly greater than in the full
set of countries (coefficient is 0.020 compared with 0.017 for the entire sample). We would have liked
to repeat the exercise for the sample of developed countries only, but the small number (26) of countries
made doing so impossible. The difference between the threshold for the full sample and the threshold for
developing countries suggests that as a group, developing countries encounter growth rate problems at a
lower debt to GDP levels.
The results, based on a Lagrangean multiplier test of equation (2), reveal the existence of a threshold
(table 4). The coefficient for the Lagrangean multiplier test is 18.66; the bootstrap p-value is 0.002. The
sample size of developing countries is 55 (reduced by lack of data on initial GDP for some countries).
Coefficients on the control variables show the expected sign. Interestingly, the coefficient on trade
openess is positive for high-debt regimes, which is understandable, but negative for low-debt regime,
possibly because of trade barriers.
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Table 4: Threshold Regression, Two Regimes Based on Estimated Threshold Debt Level, Developing
Countries Sample, Dependent Variable real average GDP growth
Variables Regime 1 Debt>=64% Regime 2 Debt<64%
Slope Std Error Slope Std Error
Log Initial 0.0249* 0.0015 0.0034 0.0024
GDP/capita(1970)
Trade Openness 0.0002* 0.0001 -0.0015* 0.0007
Inflation 0.0008* 0.0004 -0.0086 0.0311
Debt/GDP -0.0203* 0.0039 0.0739* 0.0093
Note: R^2 for the first regime is 0.98, and for the second regime is 0.98. There are 16 countries in the first regime,
and 40 in the second regime. The 95% confidence interval for the Debt/GDP in Regime 1 is [-0.0312, -0.0088], for
the second regime [0.0491, 0.0965]. These are based on Likelihood ratio test in Hansen (2000). The 95%
Confidence Interval for Threshold estimate is [0.6335, 0.8524]. * represents significance at 5% level by using
standard normal critical values as in Hansen (2000).
IV.4 Growth Costs of Exceeding the Debt Threshold
What do these figures mean in terms of the quantitative impact of public debt on growth? How costly is it
in terms of economic growth, when debt is above the threshold for an extended period of time? The fourth
main result is that the impact of the public debt to GDP ratio exceeding the threshold level is costly in
terms of GDP growth (table 5). The most extreme case is Nicaragua, where the average annual real
growth rate could have been 4.7 percent higher had debt been at the 64 percent debt threshold for
developing countries. High indebtedness was responsible for an annual loss of 4.7 percentage points of
real GDP growth, equivalent to a 264 percentage point loss over the 28 years of the study. This example
illustrates the high costs of persistent violations of debt threshold levels.
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Table 5: Estimated Forgone Growth as a Result of Exceeding the Debt Threshold, by Country
Country How high growth could Annual percentage Cumulated loss over 28
have been if the debt-to- point loss in real GDP years (percentage point
GDP ratio had been at growth loss in real GDP
the threshold level growth)
(percent real average
growth rate)
Angola 3.2 1.2 62.8
Belgium 2.7 0.6 18.4
Bolivia 2.4 0.1 1.6
Bulgaria 2.5 0.6 16.7
Burundi 2.6 0.8 24.3
Canada 3.1 0.4 11.6
Congo, Rep. of 5.0 1.0 32.7
Côte d'Ivoire 2.1 1.2 41.1
Croatia 1.5 0.2 6.0
Ecuador 3.0 0.1 1.5
Greece 2.2 0.0 0.5
Guinea 4.0 0.4 13.0
Hungary 1.8 0.1 3.2
Indonesia 6.8 1.3 45.2
Italy 2.1 0.4 10.9
Jamaica 2.0 0.2 5.1
Japan 2.9 0.6 18.6
Jordan 5.1 0.1 2.3
Lao PDR 6.8 0.8 33.0
Latvia 2.5 0.1 3.1
Lebanon 5.2 0.4 11.7
Madagascar 2.4 0.5 15.3
Mali 3.3 0.2 5.2
Nicaragua 6.6 4.7 264.6
Nigeria 3.4 0.2 4.7
Philippines 3.2 0.0 1.2
Sierra Leone 3.1 1.0 33.0
Singapore 7.3 0.4 13.0
Tanzania 5.0 0.2 6.3
Source: Authors' calculations.
Note: For developed economies a threshold of 77 percent public debt-to-GDP ratio is applied and for
developing countries of 64 percent.
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IV.5 Comparing Our Results with Reinhart and Rogoff (2010)
We compare our findings with those of Reinhart and Rogoff (2010) by running simple pooled least
squares regressions for subsamples below and above the threshold they suggest. In the pooled regressions
we find a regime switch at the 90 percent debt to GDP ratio as indicated by Reinhart and Rogoff's
analysis based on histograms. However, repeating the pooled regressions with a debt threshold of 60
percent, also shows a regime switch. These results illustrate that this methodology does not deliver clear
threshold levels.
Additionally, given the demonstrated importance of controlling for initial GDP, the use of histograms or
pooled regressions can only be indicative and must be interpreted with care. At least over longer periods
of time, public debt can become detrimental to growth at lower levels of debt.3
We pool observations on GDP growth and government debt to GDP ratios for the same 20 industrial
countries as Reinhart and Rogoff. We then run simple pooled least squares (with heteroskedasticity-
corrected errors) for two sets of countries. The first set contains countries with debt levels of at least 90
percent (table 6). The second includes countries with debt ratios below 90 percent. We compare the slope
coefficients for the government debt to GDP ratios for the two sets of regressions. The result allows a
more precise comparison of countries above and below the threshold than Reinhart and Rogoff. As
Reinhart and Rogoff (2010) suggest, there is a regime switch at the 90 percent debt to GDP ratio. 4
We extend this simple exercise by also considering a 60 percent public debt to GDP ratio (table 7). The
first set of observations corresponds to debt ratios above 60 percent, and the second group is for debt
ratios below 60 percent. The difference between slope coefficients for the two groups is small compared
with the 90 percent threshold. However, in these regressions there is a regime switch at the threshold
level, with the impact of debt on GDP turning negative above.
Table 6: GDP Growth and Debt Ratio: 90% Threshold Level
Debt Slope Std Error t test p-value
>=90% -0.0137 0.0065 -2.10 0.038
<90% 0.0012 0.0055 0.23 0.819
Table 7: GDP Growth and Debt Ratio: 60% Threshold Level
Debt Slope Std Error t test p-value
>=60% -0.0091 0.0037 -2.43 0.016
<60% -0.0057 0.0089 -0.03 0.519
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V. Conclusion
This analysis provides an analytical foundation for the debt-growth relationship by formally testing for
the existence of a threshold and estimating the threshold value while controlling for other important
variables that influence growth. The threshold value is sensitive to the inclusion of income per capita, and
it decreases when high-income countries are excluded from the sample.
The main findings are that the threshold level of the average long-run public debt to GDP ratio on GDP
growth is 77 percent for the full sample and 64 percent for the subsample of developing countries.
Surpassing these thresholds is costly for countries, which forgo GDP growth if debt exceeds the threshold
for an extended period.
The analysis of debt thresholds can be informative, but threshold levels should be interpreted with
caution. Our analysis is based on long-term averages over nearly 30 years, so that temporary deviations
from the average need not have important negative effects on growth. If a country's debt ratio exceeds the
threshold for a year or two because of a recession, its long-term growth need not suffer (Scott 2010). The
existence of debt thresholds need not preclude short-term fiscal stabilization policy. If debt explosions
move debt ratios above the threshold and keep them there for decades, however, economic growth is
likely to suffer.
VI. Appendix
Countries covered
Economy type Countries
Developing economy Algeria; Angola; Argentina; Bangladesh; Benin; Bolivia; Brazil; Bulgaria;
(75) Burkina Faso; Burundi; Cameroon; Chad; Chile; China; Colombia; Congo,
Rep. of; Costa Rica; Côte d'Ivoire; Croatia; Dominican Republic; Ecuador;
Egypt, Arab Rep. of; El Salvador; Estonia; Ethiopia; Ghana; Guatemala;
Guinea; Haiti; Honduras; Hungary; India; Indonesia; Jamaica; Jordan;
Kenya; Lao PDR; Latvia; Lebanon; Lithuania; Madagascar; Malaysia;
Mali; Mexico; Morocco; Nicaragua; Niger; Nigeria; Pakistan; Panama;
Papua New Guinea; Paraguay; Peru; the Philippines; Poland; Romania;
Russian Federation; Rwanda; Senegal; Sierra Leone; Singapore; the Slovak
Republic; Slovenia; South Africa; Sri Lanka; Tanzania; Thailand; Togo;
Tunisia; Turkey; Uganda; Ukraine; Uruguay; Venezuela, R. B. de;
Vietnam
Developed economy Australia; Austria; Belgium; Canada; the Czech Republic; Denmark;
(26) Finland; France; Germany; Greece; Iceland; Ireland; Italy; Japan; Korea,
Rep. of; Portugal; the Netherlands; New Zealand; Norway; the Slovak
Republic; Slovenia; Spain; Sweden; Switzerland; the United Kingdom; the
United States
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VII. References
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"Institutional Causes and Macroeconomic Symptoms: Volatility, Crises and Growth. Journal of
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Alfaro, Laura and Vladim Volosovych 2008. "Why doesn't Capital Flow from Rich to Poor
Countries: An Empirical Investigation". Review of Economics and Statistics, Vol. 90, p. 347-368
Buiter, Willem. 2010. "Public Debt Explosions in Developed Nations". Citi Investment
Research, March.
Caner, Mehmet, and Bruce Hansen. 2004. "Instrumental Variable Estimation of a Threshold
Model". Econometric Theory 20:813-843.
Catao, Luis A. V. and Marco Terrones. 2005. Fiscal Deficits and Inflation". Journal of Monetary
Economics 52: 529-554.
Cecchetti, Stephen, M.S. Moharty, and Fabrizio Zampolli. 2010. "The Future of Public Debt:
Prospects and Implications". Paper presented to Bank of India's International Research
Conference, February 12.
Cordella, Tito, Luca A. Ricci, and Marta Ruiz-Arranz. 2010 "Debt Overhang or Debt
Irrelevance: Revisiting the Debt Growth Link." IMF Staff Papers, forthcoming.
Frankel, Jeffrey, and David Romer, 1999."Does Trade Cause Growth?" American Economic
Review , 89(3): 379-399.
Hansen, B.E. 2000. "Sample splitting and threshold estimation," Econometrica, 68, 575-603.
Hansen, B.E. 1996."Inference when a nuisance parameter is not identified under the null
hypothesis." Econometrica 64, 413-430
Leeper, Eric and Huitxin Bi 2010."Sovereign Debt Risk and Fiscal Policy in Sweden." NBER,
Working Paper 15810, March.
Levine, Ross, and David Renelt. 1992, "A Sensitivity Analysis of Cross-Country Growth
Regressions". American Economic Review82(4): 942-963.
Pattillo, Catherine, Helene Poirson, and Luca Ricci.2002 "External Debt and Growth".IMF
Working Paper April.
Pattillo, Catherine, Helene Poirson, and Luca Ricci.2004. "What Are the Channels Through
Which External Debt Affects Growth?". IMF Working Paper January.
12
Pozen, Robert. 2010. "The US Public debt hits its tipping point". The Boston Globe, February
23.
Reinhart, Carmen and Kenneth Rogoff. 2009. This Time is Different. Princeton University
Press.
Reinhart, Carmen and Kenneth Rogoff. 2010. "Growth in a Time of Debt". American
Economic Review, May forthcoming.
Reinhart, Carmen, Kenneth S. Rogoff and Miguel A. Savastano. 2003. "Debt Intolerance".
Brookings Papers on Economic Activity, 2003:1,1-74.
Scott, Andrew. 2010. "The Long Wave of Government Debt". Vox, March 11.
1
. Cordella, Ricci, and Ruiz-Arranz (2010) also estimate threshold regressions. These results are not used
for the main message of their paper.
2
. Reinhart and Rogoff (2010) analyze 20 developed countries; other studies focus exclusively on
developing countries. See, for example Pattillo, Poirson, and Ricci (2002, 2004) and Cordella, Ricci, and
Ruiz-Arranz (2010), each of which analyzes more than 60 countries.
3
. We use a shorter period of time than Reinhart and Rogoff (2010) and general government debt rather
than central government debt.
4
. The simple pooled regression does not control for any other economic variables that affect growth or
test for the existence of a threshold. Thus, the results should be interpreted with caution.
13