DP533 Debts, Deficits and Growth in Interdependent Economies

Author(s): George Alogoskoufis, Frederick van der Ploeg
Publication Date: April 1991
Keyword(s): Asset Markets, Endogenous Growth, External Debt, Open Economics, Public Debt
JEL(s): 430
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=533

We investigate the effects of budgetary policies on growth rates, external debt, real interest rates and the stock market valuation of capital in a two-country, overlapping-generations model of endogenous growth. A worldwide rise in the public debt/GDP ratio, or the share of government consumption, reduces savings and growth. They also increase real interest rates and depress the stock market because of the adjustment costs of investment. A relative rise in one country's debt/GDP ratio or its GDP share of government consumption results in a reduction in its ratio of external assets to GDP. Growth rates are equalized unless there are differences in investment adjustment costs or depreciation rates. Per capita output levels do not necessarily converge.