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Growth, debt, and sovereign risk in a small, open economy

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  • Bhandari, Jagdeep S.
  • Ul Haque, Nadeem
  • Turnovsky, Stephen J.

Abstract

The continuing debt crisis that many developing countries have faced in the current decade has underscored the need to understand the relationships between debt accumulation and growth, as well as the need to develop policy approaches that foster adjustment in the external account while maintaining the growth of output. The purpose of this paper is to develop a macroeconomic model for a small open developing economy that borrows abroad. This model will assist in studying the dynamic interaction between debt and growth, as well as the impact of various policies and exogenous shocks on the rate of capital accumulation, the current account and debt. From this analysis, the authors make the following conclusions. An upward shift in the supply of debt leads to a long run decline in external debt, a higher domestic interest rate, less capital stock, and a reduced trade surplus. An increase in the marginal cost of debt may or may not lower long run external debt as well. An increase in productivity raises the long run stock of capital but leaves the level of external debt and the interest rate unchanged in the long run. Finally, fiscal expansion has almost no effect in either the short run or the long run.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 260.

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Date of creation: 31 Aug 1989
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Handle: RePEc:wbk:wbrwps:260

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Strategic Debt Management; Banks&Banking Reform; Financial Intermediation;

References

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  1. Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, Elsevier, vol. 7(1), pages 3-21, February.
  2. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(2), pages 251-70, May.
  3. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, Elsevier, vol. 26(3-4), pages 227-250, May.
  4. Brock, Philip L., 1988. "Investment, the current account, and the relative price of non-traded goods in a small open economy," Journal of International Economics, Elsevier, Elsevier, vol. 24(3-4), pages 235-253, May.
  5. Calvo, Guillermo A., 1987. "Real exchange rate dynamics with nominal parities Structural change and overshooting," Journal of International Economics, Elsevier, Elsevier, vol. 22(1-2), pages 141-155, February.
  6. Willem H. Buiter, 1984. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
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Citations

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Cited by:
  1. 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.
  2. Fisher, Walter H., 2004. "Imports, Status Preference, and Foreign Borrowing," Economics Series, Institute for Advanced Studies 161, Institute for Advanced Studies.
  3. Fisher, Walter H. & Hof, Franz X., 2005. "Status seeking in the small open economy," Journal of Macroeconomics, Elsevier, Elsevier, vol. 27(2), pages 209-232, June.
  4. Santanu Chatterjee & Georgios Sakoulis & Stephen Turnovsky, 2000. "Unilateral Capital Transfers, Public Investment, and Economic Growth," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1936, Econometric Society.
  5. Joshua Aizenman & Stephen Turnovsky, 1999. "Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0044, Department of Economics at the University of Washington.
  6. Sarajevs, Vadims, 1999. "Macroeconomic Model of Transition Economy: A Stochastic Calculus Approach," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 7/1999, Bank of Finland, Institute for Economies in Transition.
  7. Romulo Chumacero & Rodrigo Fuentes, 2004. "Chile's Free Trade Deals with the EU and the US: A Big Deal?," Econometric Society 2004 Far Eastern Meetings, Econometric Society 661, Econometric Society.
  8. Morales, Jorge & Tuesta, Pedro, 1998. "Calificaciones de crédito y riesgo país," Revista Estudios Económicos, Banco Central de Reserva del Perú, Banco Central de Reserva del Perú, issue 3.
  9. Stephen Turnovsky, 1999. "Knife-Edge Conditions and the Macroeconomics of Small Open Economies," Working Papers, University of Washington, Department of Economics 0031, University of Washington, Department of Economics.
  10. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers, Fondazione Eni Enrico Mattei 2004.121, Fondazione Eni Enrico Mattei.

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