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

Viral Acharya, Raghuram Rajan and Jack B. Shim

No 14961, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Sovereign debt; Government myopia; Financial repression; Allocation puzzle; Debt ceiling (search for similar items in EconPapers)
JEL-codes: F3 G28 H2 H3 H6 (search for similar items in EconPapers)
Date: 2022-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
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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