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Growth and instability in a small open economy with debt

Author

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  • Modesto, Leonor
  • Nourry, Carine
  • Seegmuller, Thomas
  • Venditti, Alain

Abstract

The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, a lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt held by domestic households is high enough, global indeterminacy does not occur.

Suggested Citation

  • Modesto, Leonor & Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2021. "Growth and instability in a small open economy with debt," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 26-37.
    • Handle: RePEc:eee:matsoc:v:112:y:2021:i:c:p:26-37
    DOI: 10.1016/j.mathsocsci.2021.03.011
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    Cited by:

    1. Nastasia Henry & Alain Venditti, 2023. "On the (de)stabilization role of protectionism: Theory and evidence," Working Papers hal-04311555, HAL.
    2. Boucekkine, Raouf & Seegmuller, Thomas & Venditti, Alain, 2021. "Advances in growth and macroeconomic dynamics: In memory of Carine Nourry," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 1-6.

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    More about this item

    Keywords

    Small open economy; Public debt; Credit constraint; Indeterminacy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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