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Debt and Growth

Author

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  • López, Ramón
  • Barbier, Eward B.

Abstract

We generalize endogenous growth models, which often assume a closed-economy, to allow for international borrowing and lending. We incorporate a prominent feature of global financial markets, that the marginal cost of borrowing facing a small open economy is dependent on the “country risk” as perceived by international lenders. This interest rate premium is determined by the ratio between debts and country assets that can be used for debt collateral. Consequently, the cost of credit is jointly influenced by international financial parameters and by endogenous country policies and growth patterns. To highlight the implications of integrating international financial considerations into an otherwise real growth model, we first use the simplest (and arguably, the most popular) one-factor growth model, the AK one, and assume that all real factors of production can be used as collateral. The model yields long-run conditions under which the country becomes a borrower in international markets, remains closed or accumulates financial wealth. The model highlights the special conditions corresponding to the solution to an AK growth model, but the outcomes of the model are richer and perhaps more realistic than conventional endogenous growth solutions. However, extending the model to include another reproducible, non-collateral asset allows for transitional dynamics but does not change the basic insights derived using the simple one-factor model.

Suggested Citation

  • López, Ramón & Barbier, Eward B., 2005. "Debt and Growth," Discussion Papers 276261, University of Bonn, Center for Development Research (ZEF).
  • Handle: RePEc:ags:ubzefd:276261
    DOI: 10.22004/ag.econ.276261
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    File URL: http://ageconsearch.umn.edu/record/276261/files/zef_dp97.pdf
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    References listed on IDEAS

    as
    1. Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 739-773.
    2. Bayoumi, Tamim & Goldstein, Morris & Woglom, Geoffrey, 1995. "Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1046-1059, November.
    3. 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.
    4. Harrison, Ann & Hanson, Gordon, 1999. "Who gains from trade reform? Some remaining puzzles," Journal of Development Economics, Elsevier, vol. 59(1), pages 125-154, June.
    5. Greenaway, David & Morgan, Wyn & Wright, Peter W, 1998. "Trade Reform, Adjustment and Growth: What Does the Evidence Tell Us?," Economic Journal, Royal Economic Society, vol. 108(450), pages 1547-1561, September.
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