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Mr. Tito Cordella, Mr. Luca A Ricci, and Marta Ruiz-Arranz

negative, as the debt overhang threshold. We define the second threshold, i.e., the indebtedness level above which the marginal effect of debt on growth becomes zero, as the debt irrelevance threshold. When we allow the nonlinear relationship between debt and growth to vary according to countries’ characteristics, we find that these characteristics indeed matter. In particular, in countries with good policies and institutions the debt overhang threshold is between 15 and 30 percent of GDP, and the debt irrelevance threshold around 70-80 percent of GDP. Countries with bad

Mr. Tito Cordella, Mr. Luca A Ricci, and Marta Ruiz-Arranz
Do Highly Indebted Poor Countries (HIPCs) suffer from a debt overhang? Is debt relief going to improve their growth rates? To answer these important questions, we look at how the debt-growth relationship varies with indebtedness levels and other country characteristics in a panel of developing countries. Our findings suggest that there is a negative marginal relationship between debt and growth at intermediate levels of debt, but not at very low debt levels, below the “debt overhang” threshold, or at very high levels, above the “debt irrelevance” threshold. Countries with good policies and institutions face overhang when debt rises above 15-30 percent of GDP, but the marginal effect of debt on growth becomes irrelevant above 70-80 percent. In countries with bad policies and institutions, overhang and irrelevance thresholds seem to be lower, but we cannot rule out the possibility that debt does not matter at all.
Mr. Tito Cordella and Marta Ruiz-Arranz

(throughout the article our indicator of indebtedness would be the debt-to-GDP ratio and we will often use interchangeably debt or indebtedness). The main findings are that the debt-growth relation is highly nonlinear and it depends on countries’ characteristics. In countries with good policies and institutions, evidence of debt overhang (that is, of a negative marginal relation between debt and growth) can be found at intermediate debt levels; when debt is above a “debt overhang” threshold of about 20–25 percent of GDP, and below a “debt irrelevance” threshold of about 70

International Monetary Fund. Research Dept.
This paper provides a brief overview of the latest research on the ability of forecasters to predict recessions. The paper highlights that few recessions have been forecast before their onset. Forecasters tend to be excessively cautious and do not revise their forecasts promptly and sufficiently to reflect incoming news. Nor do they fully take into account interdependence among economies. This paper also focuses on robust growth determinants highlighting that a fundamental problem confronting researchers is the lack of an explicit theory identifying the determinants of growth.
International Monetary Fund. Research Dept.

Volume 57 Number 1 Debt Overhang or Debt Irrelevance ? Tito Cordella, Luca Antonio Ricci, and Marta Ruiz-Arranz Decomposing Financial Risks and Vulnerabilities in Eastern Europe Andrea M. Maechler, Srobona Mitra, and Delisle Worrell Parameter Estimate Uncertainty in Probabilistic Debt Sustainability Analysis Alejandro Hajdenberg and Rafael Romeu SPECIAL SECTION: NEW PERSPECTIVES ON AFRICAN GROWTH AND DEVELOPMENT Catherine Pattillo, Editor Managing Resource Revenues in Developing Economies Paul Collier, Rick van der

International Monetary Fund

financing are presented. The money and debt irrelevance propositions are used to characterize the mechanics of inflation under alternative financing policies. Numerical simulations are used to illustrate and interpret the dynamics of inflation as implied by the alternative financing strategies. A simple example suggests that declines in inflation can be achieved only through strong fiscal reform rather than through isolated tightening of fiscal and monetary policy or price controls.

International Monetary Fund. Research Dept.

-7635 This serial publication is catalogued as follows : International Monetary Fund IMF staff papers—International Monetary Fund. v. 1– Feb. 1950– [Washington] International Monetary Fund. v. tables, diagrs. 26 cm. Three no. a year, 1950–1977; four no. a year, 1978– Indexes: Vols. 1–27, 1950–80, 1 v. ISSN 1020-7635 = IMF staff papers—International Monetary Fund. 1. Foreign exchange—Periodicals. 2. Commerce—Periodicals. 3. Currency question—Periodicals. HG3810.15 332.082 53-35483 Contents Debt Overhang or Debt Irrelevance? Tito

Mr. José M. Barrionuevo

, the model introduces a trading pattern that allows a more flexible use of credit and money. Three irrelevance propositions on the effects on inflation of debt and money financing are presented. The money and debt irrelevance propositions are used to characterize the mechanics of inflation under alternative financing policies. Numerical simulations are used to illustrate and interpret the dynamics of inflation as implied by the alternative financing strategies. A simple example suggests that declines in inflation can only be achieved only through strong fiscal

International Monetary Fund. Research Dept.

Transition Matrices Using Proportions Data: An Application to Credit Risk” Jones, Matthew T. No. 05/220 “Barriers to Capital Accumulation and the Incidence of Child Labor” Barnett, Richard C.; Espinosa-Vega, Marco No. 05/221 “Fiscal Dominance and Inflation in the Democratic Republic of the Congo” Nachega, Jean-Claude No. 05/222 “Monitoring and Commitment in Bank Lending Behavior” Blavy, Rodolphe No. 05/223 “Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link” Cordella, Tito; Ricci, Luca Antonio