Sovereign Debt and Economic Growth when Government is Myopic and Self-interested

Viral Acharya, Raghuram Rajan and Jack Shim

No 30296, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine how a sovereign’s ability to borrow abroad affects the country’s growth and steady state consumption, assuming that the government is both myopic and self-interested. Surprisingly, government myopia can increase a country’s access to external borrowing. In turn, access to borrowing can extend the government’s effective horizon as the government’s ability to borrow hinges on it convincing creditors they will be repaid, which gives it a stake in incentivizing private production and savings despite its self-interest. In a high-saving country, the lengthening of the government’s effective horizon can incentivize it to tax less, resulting in a “growth boost", with higher steady-state household consumption than if it could not borrow. However, in a country that saves little, the government may engage in more repressive policies to enhance its debt capacity and spending. This could lead to a “growth trap” where household steady-state consumption is lower than if the government had no access to external borrowing. We discuss the effectiveness of alternative debt policies, including declaring the sovereign’s debt “odious”, debt relief, and debt ceilings.

JEL-codes: A0 A1 A11 A13 A14 F0 F02 G0 G00 L0 O0 P0 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-fdg and nep-opm
Note: IFM
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Published as Viral V. Acharya & Raghuram G. Rajan & Jack B. Shim, 2024. "Sovereign debt and economic growth when government is myopic and self-interested," Journal of International Economics, .
Published as Sovereign Debt and Economic Growth When Government Is Myopic and Self-Interested , Viral V. Acharya, Raghuram G. Rajan, Jack B. Shim. in NBER International Seminar on Macroeconomics 2023 , Frankel and Rey. 2024

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Journal Article: Sovereign debt and economic growth when government is myopic and self-interested (2024)
Chapter: Sovereign Debt and Economic Growth When Government Is Myopic and Self-Interested (2023)
Working Paper: Sovereign Debt and Economic Growth when Government is Myopic and Self-interested (2022)
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