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Threshold Effects of Sovereign Debt: Evidence from the Caribbean

Threshold Effects of Sovereign Debt: Evidence from the Caribbean by Lisa Drakes
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This paper addresses the issue of threshold effects between public debt and economic growth in the Caribbean. The main finding is that there exists a threshold debt to gross domestic product (GDP) ratio of 55–56 percent. Moreover, the debt dynamics begin changing well before this threshold is reached. Specifically, at debt levels lower than 30 percent of GDP, increases in the debt-to-GDP ratio are associated with faster economic growth. However, as debt rises beyond 30 percent, the effects on economic growth diminishes rapidly and at debt levels reaching 55-56 percent of GDP, the growth impacts switch from positive to negative. Thus, beyond this threshold, debt becomes a drag on growth.
International Monetary Fund; June 2012
23 pages; ISBN 9781475514292
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Title: Threshold Effects of Sovereign Debt: Evidence from the Caribbean
Author: Lisa Drakes; Chrystol Thomas; Roland Craigwell; Kevin Greenidge