IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/260.html
   My bibliography  Save this paper

Growth, debt, and sovereign risk in a small, open economy

Author

Listed:
  • Bhandari, Jagdeep S.
  • Ul Haque, Nadeem
  • Turnovsky, Stephen J.

Abstract

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.

Suggested Citation

  • Bhandari, Jagdeep S. & Ul Haque, Nadeem & Turnovsky, Stephen J., 1989. "Growth, debt, and sovereign risk in a small, open economy," Policy Research Working Paper Series 260, The World Bank.
  • Handle: RePEc:wbk:wbrwps:260
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1989/08/01/000009265_3960928043048/Rendered/PDF/multi0page.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Willem H. Buiter, 1984. "Fiscal policy in open, interdependent economies," NBER Working Papers 1429, National Bureau of Economic Research, Inc.
    4. 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.
    5. 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.
    6. 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.
    7. 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)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen Turnovsky, 2000. "Growth in an Open Economy: Some Recent Developments," Working Papers 0015, University of Washington, Department of Economics.
    2. Joshua Aizenman & Stephen J. Turnovsky, 2002. "Reserve Requirements on Sovereign Debt in the Presence of Moral Hazard -- on Debtors or Creditors?," Economic Journal, Royal Economic Society, vol. 112(476), pages 107-132, January.
    3. Fisher, Walter H. & Hof, Franz X., 2005. "Status seeking in the small open economy," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 209-232, June.
    4. Stephen Turnovsky, 1999. "Knife-Edge Conditions and the Macroeconomics of Small Open Economies," Working Papers 0031, University of Washington, Department of Economics.
    5. Chatterjee, Santanu & Sakoulis, Georgios & Turnovsky, Stephen J., 2003. "Unilateral capital transfers, public investment, and economic growth," European Economic Review, Elsevier, vol. 47(6), pages 1077-1103, December.
    6. Morales, Jorge & Tuesta, Pedro, 1998. "Calificaciones de crédito y riesgo país," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 3.
    7. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers 2004.121, Fondazione Eni Enrico Mattei.
    8. Walter H. Fisher, 2008. "Imports, Status Preference, and Foreign Borrowing," Review of Development Economics, Wiley Blackwell, vol. 12(1), pages 1-20, February.
    9. Romulo Chumacero & Rodrigo Fuentes, 2004. "Chile's Free Trade Deals with the EU and the US: A Big Deal?," Econometric Society 2004 Far Eastern Meetings 661, Econometric Society.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/dvewbus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.