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Budgetary Policies, Foreign Indebtedness, the Stock Market, and Economic Growth

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  • van der Ploeg, Frederick

Abstract

This paper analyzes a small open economy with overlapping generations, endogenous growth, and a risk premium on foreign debt. A balanced-budget increase in public consumption or a rise in government debt raises the ratio of foreign debt to domestic income and the interest rate but depresses economic growth. Supply-side policies aimed at internalizing production externalities boost foreign indebtedness, the interest rate, and economic growth. A higher global interest rate leads, if initial foreign indebtedness is not too large, to a lower foreign debt and, if a country is dragged down by large levels of foreign debt, lower economic growth. Copyright 1996 by Royal Economic Society.

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  • van der Ploeg, Frederick, 1996. "Budgetary Policies, Foreign Indebtedness, the Stock Market, and Economic Growth," Oxford Economic Papers, Oxford University Press, vol. 48(3), pages 382-396, July.
  • Handle: RePEc:oup:oxecpp:v:48:y:1996:i:3:p:382-96
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    Cited by:

    1. Belloc, Marianna & Federici, Daniela, 2010. "A two-country NATREX model for the euro/dollar," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 315-335, March.
    2. Stephen Turnovsky, 2000. "Growth in an Open Economy: Some Recent Developments," Working Papers 0015, University of Washington, Department of Economics.
    3. Turnovsky, Stephen J. & Chattopadhyay, Pradip, 2003. "Volatility and growth in developing economies: some numerical results and empirical evidence," Journal of International Economics, Elsevier, vol. 59(2), pages 267-295, March.
    4. Sharri Byron, 2012. "Examining Foreign Aid Fungibility in Small Open Economies," Open Economies Review, Springer, vol. 23(4), pages 675-712, September.
    5. William Scarth, 2007. "Is Foreign-Owned Capital a Bad Thing to Tax?," Quantitative Studies in Economics and Population Research Reports 422, McMaster University.
    6. George Alogoskoufis, 2014. "Endogenous Growth and External Balance in a Small Open Economy," Open Economies Review, Springer, vol. 25(3), pages 571-594, July.
    7. Sochirca, Elena & Afonso, Óscar & Gil, Pedro Mazeda, 2013. "Technological-knowledge bias and the industrial structure under costly investment and complementarities," Economic Modelling, Elsevier, vol. 32(C), pages 440-451.
    8. Shaw, Ming-Fu & Lai, Ching-Chong & Chang, Wen-Ya, 2005. "Anticipated policy and endogenous growth in a small open monetary economy," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 719-743, September.
    9. Maria Thompson, 2008. "Complementarities and costly investment in a growth model," Journal of Economics, Springer, vol. 94(3), pages 231-240, September.
    10. Theo S Eicher & Uwe Walz & Stephen Turnovsky, 2000. "Financial Liberalization and Capital Flow Reversals:," Discussion Papers in Economics at the University of Washington 0003, Department of Economics at the University of Washington.
    11. Eicher, Theo S. & Schubert, Stefan F. & Turnovsky, Stephen J., 2008. "Dynamic effects of terms of trade shocks: The impact on debt and growth," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 876-896, October.
    12. Devarajan, Shantayanan & Go, Delfin S. & Page, John & Robinson, Sherman & Thierfelder, Karen, 2008. "Aid, growth, and real exchange rate dynamics," Policy Research Working Paper Series 4480, The World Bank.
    13. Chung, Keunsuk & Turnovsky, Stephen J., 2010. "Foreign debt supply in an imperfect international capital market: Theory and evidence," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 201-223, March.
    14. Hwang, Jen-Te & Chung, Chien-Ping & Wang, Chieh-Hsuan, 2010. "Debt Overhang, Financial Sector Development And Economic Growth," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 51(1), pages 13-30, June.
    15. Maria João Ribeiro Thompson, 2003. "Complementarities, Costly Investment and Multiple Equilibria in a One-Sector Endogenous Growth Model," NIPE Working Papers 7/2003, NIPE - Universidade do Minho.
    16. Theo S. Eicher & Stephen J. Turnovsky & Uwe Walz, 2000. "Optimal Policy for Financial Market Liberalizations: Decentralization and Capital Flow Reversals," German Economic Review, Verein für Socialpolitik, vol. 1(1), pages 19-42, February.
    17. Lai, Ching-Chong & Chin, Chi-Ting, 2013. "Monetary Rules And Endogenous Growth In An Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 17(02), pages 431-463, March.

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