Working Paper
External Debt and Growth in Developing Countries

A Sensitivity and Causal Analysis

The paper aims to enhance the existing literature on the debt-growth nexus by analysing the relationship in two separate country groups using the extreme bounds analysis for sensitivity tests and the mixed, fixed, and random coefficient approach that allows for heterogeneity in the causal relationship between debt and growth. Irrespective of the debt measure used, the results are robust across the two country groups—HIPC and non-HIPC—as well as two different testing procedures. The extreme bounds analysis shows that the relationship between a debt measure and economic growth is robust to changes in the conditioning set of information included in the regression equations. The mixed, fixed, and random coefficient approach, on the other hand, show a statistically significant negative causal impact running from each of the four debt measures to economic growth in both country groups. The results have important policy implications.