Working Paper: CEPR ID: DP533
Authors: George Alogoskoufis; Frederick van der Ploeg
Abstract: 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.
Keywords: open economies; public debt; endogenous growth; external debt; asset markets
JEL Codes: 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public debt (H63) | Savings (D14) |
| Public debt (H63) | Growth rates (O49) |
| Public debt (H63) | Real interest rates (E43) |
| Public debt (H63) | Stock market valuations (G19) |
| Public debt (H63) | Capital accumulation (E22) |
| Debt-to-GDP ratio increase (H69) | External assets to GDP ratio (E20) |
| Debt-to-GDP ratio increase (H69) | Current account deficits (F32) |
| Investment adjustment costs (G31) | Growth rates (O49) |