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How Do Public Investment and Financial Factors Affect Growth in a Debt-Overhang Economy?


  • Amable, Bruno
  • Chatelain, Jean-Bernard


In this paper, informational frictions lead to a rationing on the external finance of the firm in proportion to its internal net worth. The authors study the endogenously generated growth of an economy with heterogeneous firms facing a credit constraint. The productivity of individual firms is affected by the size of public infrastructures subject to congestion which are financed through taxes on profits. Growth will be influenced by the level of the interest rate through interest repayments (a debt-overhang problem) and by the tax rate. It is shown that there exists a growth-maximizing financing rule of public investment. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

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  • Amable, Bruno & Chatelain, Jean-Bernard, 1997. "How Do Public Investment and Financial Factors Affect Growth in a Debt-Overhang Economy?," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(3), pages 310-327, June.
  • Handle: RePEc:bla:manch2:v:65:y:1997:i:3:p:310-27

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    References listed on IDEAS

    1. Robertson, D & Symons, J, 1994. "Five Weeks in the Life of the Pound. Interest Rates, Expectations and Sterling's Exit from the ERM," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(1), pages 1-12, February.
    2. Levin, Eric J & Copeland, Laurence S, 1993. "Reading the Message from the U.K. Indexed Bond Market: Real Interest Rates, Expected Inflation and the Risk Premium," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 13-34, Suppl..
    3. Woodward, G Thomas, 1990. "The Real Thing: A Dynamic Profile of the Term Structure of Real Interest Rates and Inflation Expectations in the United Kingdom, 1982-89," The Journal of Business, University of Chicago Press, vol. 63(3), pages 373-398, July.
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