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Equilibrium Growth in a Small Economy Facing an Imperfect World Capital Market

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  • Stephen J. Turnovsky

Abstract

A growth model of a developing economy facing an upward‐sloping curve of debt is analyzed. Equilibrium is characterized by transitional dynamics in which consumption, capital, and debt converge to a common growth rate. The adjustment is through the debt‐capital ratio, which drives the borrowing rate to a level at which growth rates are equalized. The economy is subject to two externalities: a production externality associated with government expenditure, and a financial externality associated with the upward‐sloping supply of debt. The tax structure that enables the decentalized economy to attain the first‐best equilibrium is characterized.

Suggested Citation

  • Stephen J. Turnovsky, 1997. "Equilibrium Growth in a Small Economy Facing an Imperfect World Capital Market," Review of Development Economics, Wiley Blackwell, vol. 1(1), pages 1-22, February.
    • Handle: RePEc:bla:rdevec:v:1:y:1997:i:1:p:1-22
    DOI: 10.1111/1467-9361.00002
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