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OPTIMAL GROWTH, DEBT DYNAMICS, AND WELFARE UNDER GDP-BASED COLLATERALS

  • Daria Onori (a1)
Abstract

We analyze the consequences of external debt collaterals on the optimal growth path of a country. We develop a small open economy model of endogenous growth where public spending can be financed by borrowing on imperfect international financial markets, where the country's borrowing capacity is limited. In contrast to the existing literature, which assumes that debt is constrained by the stock of capital, we investigate the consequences of gross domestic product (GDP)-based collaterals. First, we demonstrate that the economy may converge in a finite time, which is determined endogenously, to the regime with binding collaterals. Second, in such regime the steady-state public expenditures-to-GDP ratio is greater than that of the existing literature's models. Finally, we show that the degree of financial openness rises welfare if the collateral constraint is nonbinding and reduces welfare if the constraint binds. The first effect prevails always over the second and total intertemporal welfare increases.

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Corresponding author
Address correspondence to: Daria Onori, Laboratoire d'Economie d'Orléans, Faculté de Droit, Economie et Gestion, Rue de Blois-BP 26739, 45067 Orleans Cedex 2, France; e-mail: daria.onori@univ-orleans.fr.
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I wish to thank R. Becker, R. Boucekkine, N. Debarsy, R. Dos Santos Ferreira, C. Garcia-Peñalosa, M. Giannini, E. Marchetti, F. Mariani, M. Tidball, T. Trimborn, A. Venditti, P. Villieu, and the participants to conferences and seminars at Université catholique de Louvain, GREQAM Marseilles, Université d'Orléans. Finally, I am grateful to the anonymous referees for their suggestions, which have significantly improved the paper. The usual disclaimer applies.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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