Who owns external debt

The previous equation shows the equilibrium condition for the market of the tradable good. Regarding the labor market, I assume that the total labor supply, L , is constant. Given that the variables K T and K N show a constant, common rate of growth, it is necessary to define the model variables as stationary variables, that is, variables that are constant in the steady state. As n is constant in the steady state, the variable n is also stationary. Similarly, as the relative price of the non-tradable good must be constant in the steady state, p N is another stationary variable.

Taking into consideration the externalities E 1 and E 2 , the production functions in stationary variables are:. Using the Equation 2 , the rate of interest must be:. Turnovsky shows that the dynamic in dependent economies changes when one sector is more capital intensive than the other. The static condition of efficient allocation of labor between the two sectors is obtained by equating 24 and 26 :.

This condition says that the value of the marginal product of labor in both sectors must be equal at all times. With Equation 28 , the level of p N is:. Then, the growth rates of K T and K N are obtained in stationary variables.

As will be apparent later, n is always in a steady state and is constant. Taking logarithms and time derivatives of Equation 29 , I obtain:. Similarly, I obtain the growth rate of K N in stationary variables. In the next section, the steady state solution is shown. The steady state and the relationship between external public debt and growth. The steady state solution implies the existence of the equilibrium.

Therefore, the growth rates of z , n and p N must be zero in the steady state, so their levels remain constant. Thus, for the stationary variables, the existence of the steady state has been analytically shown.

In order to study the relationship between public debt and growth, I define the proportions of external public debt to GDP and savings to GDP in the steady state. Next, I numerically analyze, in the steady state, the relationship between the proportion of external public debt to GDP and the rate of growth of the economy. Thus, in Figure 1 , the relationship between the proportion of external public debt to GDP and the growth rate in the steady state is shown.

As shown in Figure 1 , there is a nonlinear relationship between the external public debt to GDP ratio and the growth rate. That is to say, there is an inverted U-shaped curve between the proportion of external public debt to GDP and growth.

A large number of simulations were carried out and the result holds. Given that the tradable sector is the technological leader, the growth rate of the economy is benefited. Thus, national income and the savings to GDP ratio decrease, and the resources for capital accumulation decrease.

Therefore, the growth rate of the economy is damaged. Figure 1 Relationship of external public debt to GDP and growth in the steady state. The growth rate in the steady state is 0.

The level of savings to GDP ratio is 6. Point B, in Figure 1 , is where the maximum rate of growth is reached by increasing the external public debt to GDP ratio. If this case is compared with the previous one, it can be seen that the stationary variables move in the direction analytically predicted. Given that the tradable sector is the sector that generates technical progress, this flow of resources to the tradable sector stimulates economic growth positive effect.

Thus, the payment of interest on external private and public debt causes the ratio of savings to GDP to decrease from 6. It is important to note that at country risk levels of basic points, the probability of default is very high and the process of accumulation of external debt could stop abruptly, although this mechanism is not present in this model.

This flow of resources to the tradable sector stimulates economic growth positive effect. Thus the interest payments on private and public external debt reduce disposable income and the savings to GDP ratio goes from 4.

In sum, an inverted U-shaped curve has been presented here, relating the external public debt with economic growth. In the upward segment of the curve, an increase in the external public debt to GDP ratio increases growth. However, in the downward segment of the curve, an increase in the external public debt to GDP ratio decreases growth. In order to study the stability and the transitional dynamics, Equations 32 and 27 are used, yielding:.

Thus, in the transition, p N rises slowly to its new steady state level. A model of endogenous growth was developed with two productive sectors, where the tradable sector is the only one that generates domestic technical progress.

The knowledge generated in the tradable sector is used in the non-tradable sector. The tradable sector and the non-tradable sector can accumulate physical capital.

The government spends on tradable goods and on interest payments on its external debt. This expenditure is financed by a lump sum tax levied on households, and by external public debt. The government also spends on non-tradable goods, which are financed by a lump sum tax. I assume that the country risk premium increases with the level of external public debt, and that households borrow from abroad, and face a restriction on foreign credit.

I demonstrate analytically that an increase in the external public debt to GDP ratio has a positive impact on the tradable sector by reducing the relative price of the non-tradable good. Thus, with the depreciation of the real exchange rate, the fraction of labor employed in the tradable sector increases and the proportion of non-tradable capital to tradable capital decreases The relationship between external public debt and economic growth is shown to have an inverted U-shape.

Two opposite effects on the growth rate of the economy explain this nonlinearity between the external public debt to GDP ratio and growth.

The positive effect is that, when the external public debt increases, the relative price of the non-tradable good decreases, so the tradable sector attracts resources, and since the tradable sector is the technological leader, the growth rate benefits. The negative effect is that, when the external public debt increases, the country risk premium increases, and interest payments on the private and public debt increase.

Thus, the household disposable income and the savings to GDP ratio decrease, and the resources for capital accumulation are reduced; consequently, the growth rate is damaged. Thus, it has been shown that at low levels of indebtedness, an increase in the external debt to GDP ratio could promote growth; however, with high levels of indebtedness, an increase in the external debt to GDP ratio could hurt economic growth. This theoretical result resembles certain empirical results that have demonstrated a nonlinear relationship between debt and growth.

Furthermore, the inverted U-shaped relationship between external debt and economic growth indicates the existence of a maximum level of external debt, which the policy makers should avoid reaching, in order to prevent situations such as Latin America in the eighties and the European periphery in recent years. Adam, C. Aizenman, J. Kletzer and B.

Barro, R. Mankiw and X. Brauninger, M. Brock, P. Caner, M. Grennes and F. Checherita-Westphal, C. Hallett and P. Clements, B. Bhattacharya and T. Cohen, D. Eicher, T. Heijdra, B. Korinek, A. Undervaluation Through Foreign Reserve Accumulation. Krugman, P. Financing vs. Frenkel, M. Dooley and P. Wickham eds. It leads to a fall in the price of the subsidised product. Description: The objective of subsidy is to bolster the welfare of the society. It is a part of non-plan expenditure of the government.

Major subsidies in India are petroleum subsidy, fertiliser subsidy, food subsidy, interest subsidy, etc. Also See: Priority Sector. Choose your reason below and click on the Report button.

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For example, if a nation faces severe famine and cannot secure emergency food through its own resources, it might use external debt to procure food from the nation providing the tied loan. If a country needs to build up its energy infrastructure, it might leverage external debt as part of an agreement to buy resources, such as the materials to construct power plants in underserved areas.

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