Debt and Growth

Ramon Lopez and Edward Barbier

No 276261, Discussion Papers from University of Bonn, Center for Development Research (ZEF)

Abstract: We generalize endogenous growth models, which often assume a closed-economy, to allow for international borrowing and lending. We incorporate a prominent feature of global financial markets, that the marginal cost of borrowing facing a small open economy is dependent on the “country risk” as perceived by international lenders. This interest rate premium is determined by the ratio between debts and country assets that can be used for debt collateral. Consequently, the cost of credit is jointly influenced by international financial parameters and by endogenous country policies and growth patterns. To highlight the implications of integrating international financial considerations into an otherwise real growth model, we first use the simplest (and arguably, the most popular) one-factor growth model, the AK one, and assume that all real factors of production can be used as collateral. The model yields long-run conditions under which the country becomes a borrower in international markets, remains closed or accumulates financial wealth. The model highlights the special conditions corresponding to the solution to an AK growth model, but the outcomes of the model are richer and perhaps more realistic than conventional endogenous growth solutions. However, extending the model to include another reproducible, non-collateral asset allows for transitional dynamics but does not change the basic insights derived using the simple one-factor model.

Keywords: Financial Economics; International Development; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 30
Date: 2005-03-01
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:ubzefd:276261

DOI: 10.22004/ag.econ.276261

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