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A relationship between external public debt and economic growth

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  • Enrique R. Casares

    (Universidad Autónoma Metropolitana-Azcapotzalco)

Abstract

An endogenous growth model with two goods, tradable (manufacturing) and non-tradable (non-manufacturing) is presented. Domestic technological knowledge is produced only in the tradable sector. This knowledge overflows into the non-tradable sector. The government issues external debt to finance part of its spending on tradable goods. The domestic interest rate equals the world interest rate plus the country risk premium. The country risk depends positively on the level of external public debt. Households can borrow abroad and have an external credit constraint. An inverted U-shaped nonlinear relationship between the external public debt to GDP ratio and the growth rate is obtained in the steady state. There is empirical evidence showing the existence of this non-linearity between public debt and growth, for both developing and developed countries.

Suggested Citation

  • Enrique R. Casares, 2015. "A relationship between external public debt and economic growth," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 30(2), pages 219-243.
    • Handle: RePEc:emx:esteco:v:30:y:2015:i:2:p:219-243
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    3. Mohsin, Muhammad & Ullah, Hafeez & Iqbal, Nadeem & Iqbal, Wasim & Taghizadeh-Hesary, Farhad, 2021. "How external debt led to economic growth in South Asia: A policy perspective analysis from quantile regression," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 423-437.
    4. Jan Acedański & Julia Włodarczyk, 2018. "Demographics, retirement age, and real interest rates in Poland," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 10(4), pages 355-385, December.
    5. Bardhyl Dauti & Shiret Elezi, 2022. "Economic growth in the Central East European Union and the Western Balkan countries in the course of Stability and Growth Pact and COVID-19," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 40(1), pages 29-61.
    6. Gitana Dudzevičiūtė & Vida Česnuitytė & Dalia Prakapienė, 2021. "Defence Expenditure–Government Debt Nexus in the Context of Sustainability in Selected Small European Union Countries," Sustainability, MDPI, vol. 13(12), pages 1-18, June.

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    More about this item

    Keywords

    tradable sector; learning by doing; external public debt; economic growth;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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