Debt and growth

Arbeitspapier

We generalize endogenous growth models, which often assume a closed-economy, toallow for international borrowing and lending. We incorporate a prominent feature of globalfinancial 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 notchange the basic insights derived using the simple one-factor model.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEF Discussion Papers on Development Policy ; No. 97

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): López, Ramón ; Barbier, Edward B.
• Event: Veröffentlichung
• (who): University of Bonn, Center for Development Research (ZEF)
• (where): Bonn
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/32287
• Last update: 10.03.2025, 11:42 AM CET