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Public debt and financial development

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  • Hauner, David

Abstract

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.

Suggested Citation

  • Hauner, David, 2009. "Public debt and financial development," Journal of Development Economics, Elsevier, vol. 88(1), pages 171-183, January.
    • Handle: RePEc:eee:deveco:v:88:y:2009:i:1:p:171-183
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    More about this item

    Keywords

    G21 H6 Public debt Financial development Bank efficiency Bank profitability;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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