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Equilibrium Growth in a Small Economy Facing an Imperfect World Capital Market
Author(s) -
Turnovsky Stephen J.
Publication year - 1997
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00002
Subject(s) - economics , externality , debt , monetary economics , capital (architecture) , consumption (sociology) , small open economy , imperfect , general equilibrium theory , macroeconomics , microeconomics , monetary policy , social science , linguistics , philosophy , archaeology , sociology , history
A growth model of a developing economy facing an upward‐sloping curve of debt is analyzed. Equilibrium is characterized by transitional dynamics in which consumption, capital, and debt converge to a common growth rate. The adjustment is through the debt‐capital ratio, which drives the borrowing rate to a level at which growth rates are equalized. The economy is subject to two externalities: a production externality associated with government expenditure, and a financial externality associated with the upward‐sloping supply of debt. The tax structure that enables the decentalized economy to attain the first‐best equilibrium is characterized.