Sovereign Debt and Economic Growth when Government is Myopic and Self-interested / Viral V. Acharya, Raghuram Rajan, Jack Shim.

Format:

Book

Author/Creator:

Acharya, Viral V.

Contributor:

National Bureau of Economic Research.

Rajan, Raghuram.

Shim, Jack.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30296.

NBER working paper series no. w30296

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

We examine how a sovereign's ability to borrow abroad affects the country's growth and steady state consumption, assuming that the government is both myopic and self-interested. Surprisingly, government myopia can increase a country's access to external borrowing. In turn, access to borrowing can extend the government's effective horizon as the government's ability to borrow hinges on it convincing creditors they will be repaid, which gives it a stake in incentivizing private production and savings despite its self-interest. In a high-saving country, the lengthening of the government's effective horizon can incentivize it to tax less, resulting in a "growth boost", with higher steady-state household consumption than if it could not borrow. However, in a country that saves little, the government may engage in more repressive policies to enhance its debt capacity and spending. This could lead to a "growth trap" where household steady-state consumption is lower than if the government had no access to external borrowing. We discuss the effectiveness of alternative debt policies, including declaring the sovereign's debt "odious", debt relief, and debt ceilings.

Notes:

Print version record

July 2022.