Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending

16 Pages Posted: 17 Apr 2010

See all articles by Koichi Futagami

Koichi Futagami

Osaka University - School of Economics

Takeo Hori

Aoyama Gakuin University

Ryoji Ohdoi

Osaka City University - Graduate School of Economics

Date Written: April 15, 2010

Abstract

In this paper, we examine the effects of introducing constraints on government borrowing using a continuous-time overlapping generations model of a small open economy. We consider government placing constraints on the amount of government bonds outstanding by establishing an upper limit, or target level, for the ratio of government bonds to gross domestic product. We first show that there exist multiple steady states in the model small open economy. One is a steady state with high growth, the other a steady state with low growth. We next examine how changes in the target level for bonds affect economic growth rates at the steady states. If the economy has a positive amount of asset holdings, we obtain the following results. When the government runs budget surpluses, an increase in the target level for government bonds reduces the growth rate of the low-growth economy, but raises the growth rate of the high-growth economy. However, when the government runs budget deficits, an increase in the target level for government bonds raises the growth rate of the low-growth economy, but reduces the growth rate of the high-growth economy. If the economy has a negative amount of asset holdings, the results are ambiguous.

Keywords: constraints government borrowing, small open economy

JEL Classification: H54, H63, O10

Suggested Citation

Futagami, Koichi and Hori, Takeo and Ohdoi, Ryoji, Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending (April 15, 2010). ADBI Working Paper No. 212, Available at SSRN: https://ssrn.com/abstract=1589986 or http://dx.doi.org/10.2139/ssrn.1589986

Koichi Futagami (Contact Author)

Osaka University - School of Economics ( email )

1-7 Machikaneyama
Toyonaka
Osaka 560
Japan

Takeo Hori

Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

Ryoji Ohdoi

Osaka City University - Graduate School of Economics ( email )

3-3-138 Sugimoto,
Sumiyoshi-ku,
Osaka, 558-8585
Japan
+81-6-6605-2270 (Phone)

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