Public debt and Financial development: A theoretical exploration

Mustafa Ismihan () and Gulcin Ozkan

Discussion Papers from Department of Economics, University of York

Abstract: This paper proposes an analytical framework to examine the role of public debt in financial development, which remains largely unexplored in the existing literature. We find that in countries where the banking sector extends substantial credit to government, public debt is likely to harm financial development, with unfavourable implications for economic activity. As such, our results provide an alternative explanation for the ‘contractionary fiscal expansions’. We also show that the lower the financial depth, the greater the adverse effects of public borrowing on financial development and macroeconomic outcomes.

Keywords: Financial sector; credit to government; public debt. (search for similar items in EconPapers)
JEL-codes: E52 E63 H63 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-fdg and nep-mac
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Journal Article: Public debt and financial development: A theoretical exploration (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:10/14

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