Equilibrium Growth in a Small Economy Facing an Imperfect World Capital Market
A growth model of a developing economy facing an upward-sloping supply curve of debt is analyzed. Equilibrium is characterized by transitional dynamics in which consumption, capital, and debt converge to a common growth rate. The adjustment is through the debt-capital ratio, which drives the borrowing rate to a level at which growth rates are equalized. The economy is subject to two externalities: a production externality associated with government expenditure, and a financial externality associated with the upward-sloping supply of debt. The tax structure that enables the decentralized economy to attain the first-best equilibrium is characterized. Copyright 1997 by Blackwell Publishing Ltd
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Volume (Year): 1 (1997)
Issue (Month): 1 (February)
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