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Budgetary Policies, Foreign Indebtedness, the Stock Market, and Economic Growth

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  • van der Ploeg, Frederick

Abstract

This paper analyzes a small open economy with overlapping generations, endogenous growth, and a risk premium on foreign debt. A balanced-budget increase in public consumption or a rise in government debt raises the ratio of foreign debt to domestic income and the interest rate but depresses economic growth. Supply-side policies aimed at internalizing production externalities boost foreign indebtedness, the interest rate, and economic growth. A higher global interest rate leads, if initial foreign indebtedness is not too large, to a lower foreign debt and, if a country is dragged down by large levels of foreign debt, lower economic growth. Copyright 1996 by Royal Economic Society.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 48 (1996)
Issue (Month): 3 (July)
Pages: 382-96

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Handle: RePEc:oup:oxecpp:v:48:y:1996:i:3:p:382-96

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Cited by:
  1. Hwang, Jen-Te & Chung, Chien-Ping & Wang, Chieh-Hsuan, 2010. "Debt Overhang, Financial Sector Development And Economic Growth," Hitotsubashi Journal of Economics, Hitotsubashi University, Hitotsubashi University, vol. 51(1), pages 13-30, June.
  2. Maria João Ribeiro Thompson, 2003. "Complementarities, Costly Investment and Multiple Equilibria in a One-Sector Endogenous Growth Model," NIPE Working Papers, NIPE - Universidade do Minho 7/2003, NIPE - Universidade do Minho.
  3. Eicher, Theo S. & Schubert, Stefan F. & Turnovsky, Stephen J., 2008. "Dynamic effects of terms of trade shocks: The impact on debt and growth," Journal of International Money and Finance, Elsevier, Elsevier, vol. 27(6), pages 876-896, October.
  4. Stephen Turnovsky & Pradip Chattopadhyay, 1998. "Volatility and Growth in Developing Economies: Some Numerical Results and Empirical Evidence," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0055, Department of Economics at the University of Washington.
  5. William Scarth, 2007. "Is Foreign-Owned Capital a Bad Thing to Tax?," Quantitative Studies in Economics and Population Research Reports, McMaster University 422, McMaster University.
  6. Sharri Byron, 2012. "Examining Foreign Aid Fungibility in Small Open Economies," Open Economies Review, Springer, Springer, vol. 23(4), pages 675-712, September.
  7. George Alogoskoufis, 2014. "Endogenous Growth and External Balance in a Small Open Economy," Open Economies Review, Springer, Springer, vol. 25(3), pages 571-594, July.
  8. Devarajan, Shantayanan & Go, Delfin S. & Page, John & Robinson, Sherman & Thierfelder, Karen, 2008. "Aid, growth, and real exchange rate dynamics," Policy Research Working Paper Series, The World Bank 4480, The World Bank.
  9. Stephen Turnovsky, 2000. "Growth in an Open Economy: Some Recent Developments," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0015, Department of Economics at the University of Washington.
  10. Theo S Eicher & Uwe Walz & Stephen Turnovsky, 2000. "Financial Liberalization and Capital Flow Reversals:," Working Papers, University of Washington, Department of Economics 0003, University of Washington, Department of Economics.
  11. Chung, Keunsuk & Turnovsky, Stephen J., 2010. "Foreign debt supply in an imperfect international capital market: Theory and evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(2), pages 201-223, March.
  12. Maria Thompson, 2008. "Complementarities and costly investment in a growth model," Journal of Economics, Springer, Springer, vol. 94(3), pages 231-240, September.
  13. Shaw, Ming-Fu & Lai, Ching-Chong & Chang, Wen-Ya, 2005. "Anticipated policy and endogenous growth in a small open monetary economy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(5), pages 719-743, September.
  14. Sochirca, Elena & Afonso, Óscar & Gil, Pedro Mazeda, 2013. "Technological-knowledge bias and the industrial structure under costly investment and complementarities," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 440-451.
  15. Theo S. Eicher & Stephen J. Turnovsky & Uwe Walz, 2000. "Optimal Policy for Financial Market Liberalizations: Decentralization and Capital Flow Reversals," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 1(1), pages 19-42, 02.

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