Debts, Deficits and Growth in Interdependent Economies

We investigate the effects of budgetary policies on growth rates, external debt, real interest rates and the stock market valuation of capital in a two-country, overlapping-generations model of endogenous growth. A worldwide rise in the public debt/GDP ratio, or the share of government consumption, reduces savings and growth. They also increase real interest rates and depress the stock market because of the adjustment costs of investment. A relative rise in one country’s debt/GDP ratio or its GDP share of government consumption results in a reduction in its ratio of external assets to GDP. Growth rates are equalized unless there are differences in investment adjustment costs or depreciation rates. Per capita output levels do not necessarily converge.
(with Rick van der Ploeg), in Baldassarri Mario, Massimo Di Matteo and Robert Mundell (eds), International Problems of Economic Interdependence, London, Macmillan (1994).
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s