Debt accumulation: do theoretical indicators explain country data? Online publication date: Thu, 14-Oct-2010
by Magda Kandil
Global Business and Economics Review (GBER), Vol. 12, No. 4, 2010
Abstract: In an open-economy extension of the seminal Solow growth model theory suggests a number of hypotheses to explain a country's experience with debt accumulation. The empirical analysis evaluates theory's implications using time-series data within countries and across countries. For majority of countries, the rate of debt accumulation exceeds output growth, on average, over time. The domestic interest rate increases relative to the international interest rate; the higher the external debt is, within and across countries. A higher cost of borrowing forces countries to take more aggressive steps to reduce the current account deficit and in turn, external debt as a share of GDP. The lower the output growth the higher the risk premium over time. Across countries, a higher output growth supports a higher sustainable ratio of external debt to GDP. An increase in saving contributes to a significant improvement in the current account balance, as a share of GDP. Consistently, an increase in the risk premium correlates with higher savings (International Monetary Fund, Washington D.C., USA).
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