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Foreign debt, economic growth and economic crisis


  • Xuan Changyong
  • Sun Jun
  • Yan Chen


Purpose - The purpose of this paper is to examine the relationship between foreign debt, economic growth and economic crisis. Design/methodology/approach - This paper constructs a Ramsey-Cass-Koopmans model theoretically and examines empirically the relationship between foreign debt, economic growth and economic crisis using US data over the period of 2003 and 2008. Findings - The paper finds that if the debt transformation rate is low when the debt ratio rises over a certain point; economic growth will be hindered, and may even trigger economic crisis. In contrast, high debt transformation rate may facilitate economic growth. However, the paper also shows that when the debt ratio exceeds a certain point, the debt will become a barrier to economic growth. These results will be of interest to policy makers not only in developed countries but also in emerging economies such as China. Originality/value - These findings suggest that the relationship between debt, economic growth and economic crisis is not uniform, but depends on debt transformation rate.

Suggested Citation

  • Xuan Changyong & Sun Jun & Yan Chen, 2012. "Foreign debt, economic growth and economic crisis," Journal of Chinese Economic and Foreign Trade Studies, Emerald Group Publishing, vol. 5(2), pages 157-167, June.
  • Handle: RePEc:eme:ceftpp:v:5:y:2012:i:2:p:157-167

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    References listed on IDEAS

    1. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472 National Bureau of Economic Research, Inc.
    2. Liutang Gong & Heng-fu Zou, 2001. "Foreign Aid Reduces Labor Supply and Capital Accumulation," Review of Development Economics, Wiley Blackwell, vol. 5(1), pages 105-118, February.
    3. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    4. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    5. Helene Poirson Ward & Luca A Ricci & Catherine A Pattillo, 2004. "What Are the Channels Through Which External Debt Affects Growth?," IMF Working Papers 04/15, International Monetary Fund.
    6. Kharroubi, E., 2008. "Domestic Savings and Foreign Capital: the Complementarity Channel," Working papers 212, Banque de France.
    7. Rehana Siddiqui & Afia Malik, 2001. "Debt and Economic Growth in South Asia," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 677-688.
    8. Sachs, Jeffrey, 1989. "Efficient debt reduction," Policy Research Working Paper Series 194, The World Bank.
    9. Chowdhury, Abdur R., 2001. "External Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis," WIDER Working Paper Series 095, World Institute for Development Economic Research (UNU-WIDER).
    10. Cui, Xiaoyong & Gong, Liutang, 2008. "Foreign aid, domestic capital accumulation, and foreign borrowing," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1269-1284, September.
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