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Optimal Growth and Debt Dynamics under GDP-Based Collaterals

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  • Daria Onori

    () (LEO - Laboratoire d'Économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - Université de Tours - UO - Université d'Orléans)

Abstract

This paper analyzes the consequences of external debt collaterals on the optimal growth path of a country. To this end we develop a small open economy model of endogenous growth where public spending can be financed by borrowing on imperfect international financial markets, where the country's borrowing capacity is limited. In contrast to the existing literature, which assumes that debt is constrained by the stock of capital, we investigate the consequences and policy implications of GDP-based collaterals. First, we show that the economy may converge in a finite time to the regime with binding collateral constraint. Second, in such regime the steady state public expenditures-to-GDP ratio is greater than that of the existing literature's models. Finally, if the economy is not sufficiently developed, in financial and economic terms, the country will stay in autarky forever.

Suggested Citation

  • Daria Onori, 2015. "Optimal Growth and Debt Dynamics under GDP-Based Collaterals," Working Papers halshs-01251352, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01251352
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01251352
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    Keywords

    open economy; two-stage growth; external debt; GDP-based collaterals; imperfect nancial markets; multi-stage optimal control.;

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