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Threshold Effects of Sovereign Debt: Evidence from the Caribbean

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.