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A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony

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  • Mark Roberts

Abstract

There is some evidence of a non-monotonic relationship between public debt and economic growth. With reference to the Diamond (1965) OLG model, we provide a rationale for this possibility; (i) where the financial sector is monopsonistic; (ii) where the acquisition of its equity constitutes a form of non-productive saving; (iii) where public debt has a fixed price form. As a competing asset, the issuance of debt reduces financial profits and equity values and, possibly over an initial range, the sum of non-productive saving, comprising public debt and financial sector equity, thereby leading to a net crowding-in effect.

Suggested Citation

  • Mark Roberts, 2014. "A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony," Discussion Papers 2014/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:14/02
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    File URL: https://www.nottingham.ac.uk/cfcm/documents/papers/cfcm-2014-02.pdf
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Checherita-Westphal, Cristina & Rother, Philipp, 2012. "The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area," European Economic Review, Elsevier, vol. 56(7), pages 1392-1405.
    3. Michael Bräuninger, 2005. "The Budget Deficit, Public Debt, and Endogenous Growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 827-840, December.
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    Cited by:

    1. Mark Roberts, 2014. "The maximum debt-GDP ratio and endogenous growth in the Diamond overlapping generations model: Three overlapping generations are better than two," Discussion Papers 2013/01, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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    More about this item

    Keywords

    Public debt; monopsony; non-productive saving; financial sector equity; economic growth;
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