A relationship between external public debt and economic growth
An endogenous growth model with two goods, tradable (manufacturing) and non-tradable (non-manufacturing) is presented. Domestic technological knowledge is produced only in the tradable sector. This knowledge overflows into the non-tradable sector. The government issues external debt to finance part of its spending on tradable goods. The domestic interest rate equals the world interest rate plus the country risk premium. The country risk depends positively on the level of external public debt. Households can borrow abroad and have an external credit constraint. An inverted U-shaped nonlinear relationship between the external public debt to GDP ratio and the growth rate is obtained in the steady state. There is empirical evidence showing the existence of this non-linearity between public debt and growth, for both developing and developed countries.
Adam, C. S. and D. L. Bevan. 2005. Fiscal Deficits and Growth in Developing Countries, Journal of Public Economics, 89: 571-597.
Aizenman, J., K. Kletzer and B. Pinto. 2007. Economic Growth with Constraints on Tax Revenues and Public Debt: Implications for Fiscal Policy and Cross Country Differences, NBER Working Paper Series, no. 12750.
Barro, R. J., N. G. Mankiw and X. Sala-i-Martin. 1995. Capital Mobility in Neoclassical Models of Growth, American Economic Review, 85: 103-115.
Brauninger, M. 2005. The Budget Deficit, Public Debt, and Endogenous Growth, Journal of Public Economic Theory, 7(5): 827-840.
Brock, P. L. and S. J. Turnovsky. 1994. The Dependent-Economy Model with Both Traded and Non traded Capital Goods, Review of International Economics , 2: 306-325.
Caner, M., T. Grennes and F. Koehler-Geib. 2010. Finding the Tipping Point- When Sovereign Debt Turns Bad, The World Bank, Policy ResearchWorking Papers, no. 5391.
Checherita-Westphal, C. and P. Rother. 2012. The Impact of High Government Debt on Economic Growth and its Channels: An Empirical Investigation for the Euro Area, European Economic Review, 56(7): 1392-1405.
Checherita-Westphal, C., A. H. Hallett and P. Rother. 2014. Fiscal Sustainability Using Growth-Maximizing Debt Targets, Applied Economics, 46: 638-647.
Clements, B., R. Bhattacharya and T. Q. Nguyen. 2003. External Debt, Public Investment, and Growth in Low-Income Countries, International Monetary Fund, IMF Working Papers, no. 249.
Cohen, D. 1993. Low Investment and Large LDC Debt in the 1980’s, American Economic Review, 83(3): 437-449.
Cohen, D. and J. Sachs. 1986. Growth and External Debt Under Risk of Debt Repudiation, European Economic Review, 30: 529-560.
Eicher, T. and L. Hull. 2004. Financial Liberalization, Openness and Convergence, Journal of International Trade & Economic Development, 13: 443-459.
Eicher, T. and S. J. Turnovsky. 1999. International Capital Markets and Non- Scale Growth, Review of International Economics, 7: 171-188.
Heijdra, B. and F. van der Ploeg. 2002. The Foundations of Modern Macroeconomics , Oxford University Press.
Korinek, A. and L. Serven. 2010. Undervaluation Through Foreign Reserve Accumulation. Static Losses, Dynamic Gains, World Bank, Policy Research Working Papers, no. 5250.
Krugman, P. 1988. Financing vs. Forgiving a Debt Overhang, Journal of Development Economics, 29: 253-268.
Krugman, P. 1989. Market-Based Debt-Reduction Schemes, in J.A. Frenkel, M.P. Doo- ley and P. Wickham (eds.) Analytical Issues in Debt, pp. 258-278.
Kumar, M. S. and J. Woo. 2010. Public Debt and Growth, International Monetary Fund, IMF Working Papers, no. 174.
Pancrazi, R., H. D. Seoane and M. Vukotic. 2014. Sovereign Risk, Private Credit, and Stabilization Policies , University of Warwick.
Panizza, U. and A. F. Presbitero. 2013. Public Debt and Economic Growth in Advanced Economies: A Survey, Swiss Journal of Economics and Statistics, 149(2): 175-204.
Pattillo, C., H. Poirson and L. Ricci. 2002. External Debt and Growth, International Monetary Fund, IMF Working Papers, no. 69.
Pattillo, C., H. Poirson and L. Ricci. 2004. What Are the Channels Through Which External Debt Affects Growth?, International Monetary Fund, IMF Working Papers, no. 15.
Pattillo, C., H. Poirson and L. Ricci. 2011. External Debt and Growth, Review of Economics and Institutions, 2: 1-30.
Reinhart, C. M. and K. S. Rogoff. 2010. Growth in a Time of Debt, American Economic Review, 100(2): 573-578.
Romer, P. M. 1989. Capital Accumulation in the Theory of Long Run Growth, in R. Barro (ed.), Modern Business Cycle Theory, Basil Blackwell.
Saint-Paul, G. 1992. Fiscal Policy in an Endogenous Growth Model, Quarterly Journal of Economics, 107: 1243-1259.
Serven, L. 2007. Fiscal Rules, Public Investment, and Growth, The World Bank, Policy Research Working Papers, no. 4382.
Turnovsky, S. J. 1996. EndogenousGrowth in a Dependent Economy with Traded and Non traded Capital, Review of International Economics, 4: 300-321.
Turnovsky, S. J. 1997. International Macroeconomic Dynamic, The MIT Press.
Valentinyi, A. and B. Herrendorf. 2008. Measuring Factor Income Shares at the Sectorial Level, Review of Economic Dynamics, 11: 820-835.
Abstract viewed - 875 times
PDF downloaded: 332 times
XML downloaded: 0 times