Determining optimal public debt and debt-growth dynamics in the Caribbean

Available from: 
October 2013
Paper author(s): 
Wright Allan (CEMLA and Central Bank of Barbados)
Macroeconomics - Economic growth - Monetary Policy
Fiscal Policy - Public and Welfare Economics

This study computes the optimal debt/GDP ratio for selected Caribbean countries and benchmarks those against actual ratios using a modified Blanchard (1983) calibration exercise. It also investigates the debt-growth and debt-investment links using panel dynamic ordinary least squares (PDOLS) estimations. Additionally, by employing threshold dynamics, the study also estimates a tipping point beyond which debt weighs on growth. The results show that several countries have debt/GDP ratios higher than the calibrated optimal suggested by the modified Blanchard exercise. Additionally, the empirical results suggest that high indebtedness negatively impacts economic growth and investment after a debt/GDP threshold of 61percent is reached. The findings of the study have policy relevance for Caribbean countries that are challenged by persistent high debt and low growth in the context where development is financed largely by debt accumulation.


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Research section: 
Lacea 2013 annual meeting
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