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Public debt and financial development

  • Hauner, David

We examine the role of public debt in financial development. The literature has highlighted its supportive role through providing collateral and benchmark. We contrast this "safe asset" view to a "lazy banks" view: developing banking sectors that lend mainly to the public sector may develop more slowly, because it could make banks profitable but inefficient. Results from country-level and bank-level regressions are more supportive of the "lazy banks" view, but the "safe asset" view seems to play a role at moderate levels of public debt held by banks. There is also evidence of a harmful interaction between public debt and financial repression.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 1 (January)
Pages: 171-183

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Handle: RePEc:eee:deveco:v:88:y:2009:i:1:p:171-183
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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