Debt and Growth

ZEF Discussion Papers on Development Policy No. 97

44 Pages Posted: 8 Oct 2018

See all articles by Ramón López

Ramón López

University of Maryland - Department of Agricultural & Resource Economics

Edward B. Barbier

Colorado State University, Fort Collins - Department of Economics

Date Written: March 2005

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 and Barbier, Edward B., Debt and Growth (March 2005). ZEF Discussion Papers on Development Policy No. 97 . Available at SSRN: https://ssrn.com/abstract=3249380 or http://dx.doi.org/10.2139/ssrn.3249380

Ramón López (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States
301-405-1281 (Phone)
301-405-9091 (Fax)

Edward B. Barbier

Colorado State University, Fort Collins - Department of Economics ( email )

Fort Collins, CO 80523-1771
United States

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