A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony

Mark Roberts

No 2014/02, Discussion Papers from University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM)

Abstract: There is some evidence of a non-monotonic relationship between public debt and economic growth. With reference to the Diamond (1965) OLG model, we provide a rationale for this possibility; (i) where the financial sector is monopsonistic; (ii) where the acquisition of its equity constitutes a form of non-productive saving; (iii) where public debt has a fixed price form. As a competing asset, the issuance of debt reduces financial profits and equity values and, possibly over an initial range, the sum of non-productive saving, comprising public debt and financial sector equity, thereby leading to a net crowding-in effect.

Keywords: Public debt; monopsony; non-productive saving; financial sector equity; economic growth (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-gro
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Persistent link: https://EconPapers.repec.org/RePEc:not:notcfc:14/02

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