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Growth, Capital Accumulation and Foreign Debt

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  • Ross Milbourne

Abstract

This paper investigates the relationship between growth, population growth, capital accumulation and foreign debt. The paper uses an open economy neoclassical growth model to look at what macroeconomic forces explain why a number of countries accumulated (often unsustainable) debt and others did not. We show that a condition for debt stabilization relates the marginal propensity to consume out of wealth to the population growth rate and real rate of interest. The paper also shows that higher natural population growth must be associated with a higher level of net foreign debt per head, but that the same conclusion does not follow for higher rates of immigration, nor necessarily for higher rates of productivity growth. Finally, the paper characterizes a fiscal policy rule which if followed would prevent economies from entering debt traps following adverse shocks.

Suggested Citation

  • Ross Milbourne, 1997. "Growth, Capital Accumulation and Foreign Debt," Economica, London School of Economics and Political Science, vol. 64(253), pages 1-13, February.
    • Handle: RePEc:bla:econom:v:64:y:1997:i:253:p:1-13
    DOI: 10.1111/1468-0335.00060
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    Cited by:

    1. Daniel Spiro, 2021. "An Open-Economy Ramsey-Cass-Koopmans Model in Reduced Form," CESifo Working Paper Series 9293, CESifo.
    2. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
    3. Leung, Hing-Man, 2000. "Trade and growth: a theoretical exploration into foreign debts by NICs," Economic Modelling, Elsevier, vol. 17(1), pages 35-47, January.
    4. Pemberton, James, 2000. "National and international privatisation of pensions," European Economic Review, Elsevier, vol. 44(10), pages 1873-1896, December.
    5. Stephen Kosempel, 2005. "Capital Mobility in an Open Economy Model with Embodied Productivity Growth," Working Papers 0506, University of Guelph, Department of Economics and Finance.
    6. Beladi, Hamid & Chao, Chi-Chur, 2003. "The role of export subsidies in balance-of-payment crises," European Journal of Political Economy, Elsevier, vol. 19(4), pages 875-884, November.
    7. Stephen Kosempel, 2007. "Interaction between knowledge and technology: a contribution to the theory of development," Canadian Journal of Economics, Canadian Economics Association, vol. 40(4), pages 1237-1260, November.
    8. Valeria De Bonis, 2023. "The debt to wealth ratio vs the debt to GDP ratio as an indicator of financial stability," Public Finance Research Papers 57, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.

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