When is Debt Odious? A Theory of Repression and Growth Traps

Viral Acharya, Raghuram Rajan and Jack Shim ()
Additional contact information
Jack Shim: NYU - Stern School of Business

No 2020-18, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: How is a developing country affected by its government’s ability to borrow in international markets? We examine the dynamics of a country’s growth, consumption, and sovereign debt, assuming that the government’s objective is to maximize short-term, typically wasteful, expenditures. Sovereign debt can extend the government’s effective horizon; the government’s ability to borrow hinges on its convincing investors they will be repaid, which gives it a stake in the future. The lengthening of the government’s effective horizon can incentivize it to adopt policies that result in higher steady-state household consumption than if it could not borrow. However, access to borrowing does not always improve government behavior. In a developing country that saves little, the government may engage in repressive policies to enhance its debt capacity, which only ensures that successor governments repress as well. This leads to a “growth trap†where household steady-state consumption is lower than if the government had no access to debt. We argue that such a model can explain the well-known negative correlation between a developing economy’s reliance on external financing and its economic growth. We also analyze the effects of instruments such as debt relief, a debt ceiling, and fiscal transfers in helping a developing economy emerge out of a growth trap, even when governed by a myopic, possibly rapacious, government.

Keywords: Sovereign debt; government myopia; financial repression; allocation puzzle; debt ceiling (search for similar items in EconPapers)
JEL-codes: F3 G28 H2 H3 H6 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2020
New Economics Papers: this item is included in nep-fdg and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://repec.bfi.uchicago.edu/RePEc/pdfs/BFI_WP_202018.pdf (application/pdf)

Related works:
Working Paper: When is Debt Odious? A Theory of Repression and Growth Traps (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfi:wpaper:2020-18

Access Statistics for this paper

More papers in Working Papers from Becker Friedman Institute for Research In Economics Contact information at EDIRC.
Bibliographic data for series maintained by Toni Shears ( this e-mail address is bad, please contact ).