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Debts, Deficits and Growth in Interdependent Economies

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  • Alogoskoufis, George
  • van der Ploeg, Frederick

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.

Suggested Citation

  • Alogoskoufis, George & van der Ploeg, Frederick, 1991. "Debts, Deficits and Growth in Interdependent Economies," CEPR Discussion Papers 533, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:533
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    1. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 645-661.
    2. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
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    Cited by:

    1. Klaus Waelde, 1994. "Trade pattern reversal: The role of technological change, factor accumulation and government intervention," International Trade 9403003, University Library of Munich, Germany, revised 06 Apr 1994.
    2. Casper Ewijk, 1994. "Growth promoting policies, distribution, and the balance of payments," Journal of Economics, Springer, vol. 60(1), pages 55-80, February.

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