Chapter

External Debt, Adjustment, and Growth

Delano P. Villanueva and Roberto S. Mariano

in Fiscal Policy and Management in East Asia

Published by University of Chicago Press

Published in print November 2007 | ISBN: 9780226386812
Published online February 2013 | e-ISBN: 9780226387062 | DOI: http://dx.doi.org/10.7208/chicago/9780226387062.003.0007
External Debt, Adjustment, and Growth

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High ratios of external debt to GDP in selected Asian countries have contributed to the initiation, propagation, and severity of the financial and economic crises in recent years, reflecting runaway fiscal deficits and excessive foreign borrowing by the private sector. Using the formal framework proposed by Mariano and Villanueva (2005) and using data from the Philippines, this chapter explores the joint dynamics of external debt, capital accumulation, and growth. After analyzing the links between domestic adjustment policies, foreign borrowing, and growth, it estimates the optimal domestic saving rate that is consistent with maximum real consumption per unit of effective labor in the long run. As a by-product, the chapter also measures the steady-state ratio of net external debt to GDP that is associated with this optimal outcome. It first describes the structure of the open-economy growth model with endogenous technical change and then uses Gross National Disposable Income (GNDI) instead of GDP to determine domestic saving. The chapter also draws some implications for fiscal policy and external debt management.

Keywords: Philippines; external debt; capital accumulation; growth; domestic adjustment policies; foreign borrowing; domestic saving rate; GDP; GNDI; fiscal policy

Chapter.  8607 words.  Illustrated.

Subjects: Business and Management

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