Points in bold correspond to estimates of γj significantly different from zero, at the 10 percent confidence level.

OLS-based kernel estimates suggest debt starts having significant deleterious effects on growth when it reaches just above half of GDP. With fixed effects on Figure 1, the nonlinearity exhibits a similar pattern but the threshold level now increases to around 60 percent of GDP. In this region the point estimate for γj is around −1.7. This implies an increase in the debt to GDP ratio by a factor of 1.5 translates into an annual GDP growth rate lower by 0.7 percent.<sup>22</sup> Interestingly, the link between debt and growth becomes insignificant at high debt levels when country fixed effects are included: it is largely because of time invariant controls that high debt tends to be associated to in low growth. The Figure’s lower panel presents the kernel estimation results for the ratio of debt face value to exports. As in Figure 1, controlling for fixed effects tends to substantially increase the range over which a negative and significant relationship between debt and growth exists, from 150 to 200 percent of exports. A noticeable difference is that coefficients γj do not exhibit a similar downward pattern in OLS based kernel estimations. This might by explained by cross-country differences in export levels, which are captured imperfectly by the control variables and, in particular, by trade openness. In fact, when fixed effects are controlled for, the kernel estimation of debt to exports coefficients do exhibit a downward pattern again.

The results for the ratios involving the present value of debt are reported on Figure 2. The same phenomena are apparent: the estimated overhang range shifts to the right when country specific intercepts are allowed for. OLS suggests a maximum in the debt Laffer curve occurs when the present value of debt reaches around 30 percent of GDP, but it is closer to 40 percent with country specific fixed effects. OLS estimates for the ratio to exports are once again not downward sloping, but this is corrected when the kernel implements a within-group estimator. Interestingly, both present value measures also point to a positive and significant effect of debt on growth at low debt levels, i.e. below 20 of GDP and 50 percent of exports.<sup>23</sup> The debt relief initiative has been targeting especially low income economies, where overhang issues are argued to be most prevalent. It is therefore of particular interest to reproduce our analysis inside and outside of the sample formed by the 45 countries categorized as low income by the World Bank. Figures 3 and 4 report the corresponding estimates. Even though the conclusions are somewhat weakened in reduced samples, the distinction according to income levels is clearly relevant.<sup>24</sup> While significantly negative coefficients continue to prevail in the sample of low income countries, they are completely absent from the complementary set of countries. This suggests the view that low income countries are disproportionately affected by debt overhang problems is justified, at least on grounds of growth effects. It remains to be seen whether the mechanisms at play are indeed consistent with theory: comparing Figures 3 and 4 suggests the main reason why low income countries may experience overhang is simply because they are more indebted on average.

> 22 I.e. ln(1.5)*1.7

> 23 The actual number of significant coefficients represented on the Figures cannot straighforwardly be interpreted as reflecting the number of actual observations driving the evidence on debt overhang. Rather, each significantly negative point in the kernel reflects a sample where overhang prevails, whose size equals the bandwidth used in the estimator.

> 24 Our initial sample splits roughly half way between the two income categories.

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