Structural origins of debt-sustainability in mature and transition economies: Domar, Balassa–Samuelson and Maastricht

Trond-Arne Borgersen and Roswitha M. King

Structural Change and Economic Dynamics, 2014, vol. 30, issue C, 101-119

Abstract: This paper analyses the relation between the structure of GDP and a country's debt sustainability. A two-sector model with endogenous relative sector sizes is developed to formally show that under certain conditions the debt sustainability, measured as the limiting value of the debt-to-GDP ratio, of transition economies exceeds that of mature market economies. This ‘advantage’ comes from structural factors: sectoral imbalances of growth and shifts in sectoral composition of GDP. Furthermore, among transition economies those with relatively higher structural flexibility can sustain relatively higher debt-to-GDP ratios. How much debt relative to GDP a country can sustain is shown to be highly context specific and depends on the economic structure, composition of growth, structural flexibility, and the prevailing incentives for restructuring. But should a country carry a high debt level relative to GDP just because it can? The paper answers this question by distinguishing between two categories of transition economies: Those that could and should and those that could but should not exploit their capacity to sustain high debt levels.

Keywords: Debt sustainability; Growth; Transition; Stability; Economic structure (search for similar items in EconPapers)
JEL-codes: P24 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:30:y:2014:i:c:p:101-119

DOI: 10.1016/j.strueco.2014.03.002

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