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The Role of Domestic Debt Markets in Economic Growth

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Author Info

  • S. M. Ali Abbas
  • Jakob Christensen

Abstract

We develop a new public domestic debt (DD) database covering 93 low-income countries and emerging markets over the 1975-2004 period to estimate the growth impact of DD. Moderate levels of non-inflationary DD, as a share of GDP and bank deposits, are found to exert a positive overall impact on economic growth. Granger-causality regressions suggest support for a variety of channels: improved monetary policy; broader financial market development; strengthened domestic institutions/accountability; and enhanced private savings and financial intermediation. There is some evidence that, above a ratio of 35% percent of bank deposits, DD begins to undermine growth, lending credence to traditional crowding out and bank efficiency concerns. Importantly, the growth contribution of DD is higher if it is marketable, bears positive real interest rates and is held outside the banking system. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/127.

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Length: 40
Date of creation: 01 Jun 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/127

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Keywords: Domestic debt; Fiscal policy; Emerging markets; Africa; Public debt; Economic growth; Savings; Low-income developing countries; bond; central bank; external debt; crowding out; bonds; government debt; domestic financing; financial repression; financial sector; bond markets; bond market; debt sustainability; financial markets; domestic currency; foreign aid; financial system; external borrowing; debt management; financial intermediation; government bond; government bonds; financial liberalization; financial market development; public finance; debt overhang; debt stock; domestic borrowing; debt contracts; currency risk; domestic savings; debt database; debt reduction; bond market capitalization; liquid liabilities; domestic debt markets; external financing; government bond markets; external finance; sovereign bonds; financial market; bond market development; deposit rate; external debt reduction; local currency bond; reserve requirements; domestic capital; debt service; foreign currency debt; private sector borrowing; deposit money banks; corporate bond market; debt management practices; international financial markets; national debt; local currency bond markets; international capital; debt structure; access to international financial markets; financial structure; private debt; international country risk guide; public finances; public external debt; international capital markets; domestic saving; developing government bond; debt terms; external debt stock; budget balance; corporate bond; currency debt; interest rate controls; central banks; financial institutions; developing government bond markets; debt ratio; external debt service; long-term bonds; local bond; debt management capacity; public sector indebtedness; deposit money; term bonds; present value; local bond market; government bonds net wealth; international finance; financial systems; financial fragility; bond issuance; fiscal gap; financial reforms; treasury bonds; domestic government bonds; external indebtedness;

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  1. David Hauner, 2006. "Fiscal Policy and Financial Development," IMF Working Papers 06/26, International Monetary Fund.
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Citations

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Cited by:
  1. Daniel, L., 2008. "Foreign investors’ participation in emerging market economies’ domestic bond markets," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 12, pages 61-77, Summer.
  2. Tatom, John, 2007. "Is Tax Policy Retarding Growth in Morocco?," MPRA Paper 6011, University Library of Munich, Germany.
  3. Francis, Johanna L. & Aykut, Dilek & Tereanu, Eugen, 2014. "The cost of private debt over the credit cycle," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 146-181.
  4. Moore, Winston & Thomas, Chrystol, 2008. "A Meta-Analysis of the Relationship between Debt and Growth," MPRA Paper 21474, University Library of Munich, Germany.
  5. Anastasia Guscina, 2008. "Impact of Macroeconomic, Political, and Institutional Factorson the Structure of Government Debt in Emerging Market Countries," IMF Working Papers 08/205, International Monetary Fund.
  6. Ghirmai T Kefela, 2008. "Regulatory Challenges Strategically Enhance Banking Efficiency and stability: The study of East African countries," Indus Journal of Management & Social Science (IJMSS), Department of Business Administration, vol. 2(2), pages 129-147, December.
  7. Thumrongvit, Patara & Kim, Yoonbai & Pyun, Chong Soo, 2013. "Linking the missing market: The effect of bond markets on economic growth," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 529-541.
  8. Ante Žigman & Boris Cota, 2011. "The impact of fiscal policy on government bond spreads in emerging markets," Financial Theory and Practice, Institute of Public Finance, vol. 35(4), pages 385-412.
  9. Zhang, Yuewen, 2010. "Sovereign Risk Management in Recession: The Cases of Sweden and China," MPRA Paper 23364, University Library of Munich, Germany.
  10. Michael Mbate, 2013. "Domestic Debt, Private Sector Credit and Economic Growth in Sub-Saharan Africa," African Development Review, African Development Bank, vol. 25(4), pages 434–446.

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