Explaining Cross-Country Heterogeneity in Debt Overhang Thresholds

This paper estimates debt overhang thresholds separately for 105 countries using a Kalman Filter approach applied to a standard growth model. The results reveal pronounced heterogeneity in the estimated thresholds, both within and across country groups but limited time-variation. In a second step, we explore the structural factors underlying this heterogeneity. The empirical results underscore that a strong payment track record, high quality institutions and governance, public debt composition (currency, maturity, and creditor base), and financial market size and development are associated with higher pubic debt overhang thresholds.