Does Foreign Debt Contribute to Economic Growth?

TL;DR

This paper investigates the causal relationship between foreign debt and economic growth, showing that higher foreign debt can promote growth through increased investment, especially in OECD countries, using panel data and instrumental variables.

Contribution

It provides empirical evidence of a causal link between foreign debt and GDP growth, highlighting the role of sovereign default risk and differences between OECD and non-OECD countries.

Findings

Foreign debt positively correlates with GDP growth.

Sovereign default risk influences the impact of foreign debt.

Foreign debt increases investment leading to growth.

Abstract

We study the relationship between foreign debt and GDP growth using a panel dataset of 50 countries from 1997 to 2015. We find that economic growth correlates positively with foreign debt and that the relationship is causal in nature by using the sovereign credit default swap spread as an instrumental variable. Furthermore, we find that foreign debt increases investment and then GDP growth in subsequent years. Our findings suggest that lower sovereign default risks lead to higher foreign debt contributing to GDP growth more in OECD than non-OECD countries.