Growth, capital accumulation and foreign debt

Abstract

This paper investigates the relationship between growth, population growth, capital accumulation and foreign debt. The paper uses an open economy neoclassical growth model to look at what macroeconomic forces explain why a number of countries accumulated (often unsustainable) debt and others did not. We show that a condition for debt stabilization relates the marginal propensity to consume out of wealth to the population growth rate and real rate of interest. The paper also shows that higher natural population growth must be associated with a higher level of net foreign debt per head, but that the same conclusion does not follow for higher rates of immigration, nor necessarily for higher rates of productivity growth. Finally, the paper characterizes a fiscal policy rule which if followed would prevent economies from entering debt traps following adverse shocks.