Growth, debt, and sovereign risk in a small, open economy
The continuing debt crisis that many developing countries have faced in the current decade has underscored the need to understand the relationships between debt accumulation and growth, as well as the need to develop policy approaches that foster adjustment in the external account while maintaining the growth of output. The purpose of this paper is to develop a macroeconomic model for a small open developing economy that borrows abroad. This model will assist in studying the dynamic interaction between debt and growth, as well as the impact of various policies and exogenous shocks on the rate of capital accumulation, the current account and debt. From this analysis, the authors make the following conclusions. An upward shift in the supply of debt leads to a long run decline in external debt, a higher domestic interest rate, less capital stock, and a reduced trade surplus. An increase in the marginal cost of debt may or may not lower long run external debt as well. An increase in productivity raises the long run stock of capital but leaves the level of external debt and the interest rate unchanged in the long run. Finally, fiscal expansion has almost no effect in either the short run or the long run.
|Date of creation:||31 Aug 1989|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sen, Partha & Turnovsky, Stephen J., 1989.
"Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect,"
Journal of International Economics,
Elsevier, vol. 26(3-4), pages 227-250, May.
- Partha Sen & Stephen J. Turnovsky, 1988. "Deterioration of the Terms of Trade and Capital Accumulation: A Reexamination of the Laursen-Metzler Effect," NBER Working Papers 2616, National Bureau of Economic Research, Inc.
- Maurice Obstfeld, 1982.
"Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 97(2), pages 251-270.
- Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
- Willem H. Buiter, 1984. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc.
- Calvo, Guillermo A., 1987. "Real exchange rate dynamics with nominal parities Structural change and overshooting," Journal of International Economics, Elsevier, vol. 22(1-2), pages 141-155, February.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Brock, Philip L., 1988. "Investment, the current account, and the relative price of non-traded goods in a small open economy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 235-253, May.
- Eaton, Jonathan & Gersovitz, Mark, 1980. "LDC participation in international financial markets : Debt and reserves," Journal of Development Economics, Elsevier, vol. 7(1), pages 3-21, February. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:260. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.