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Public debt and financial development: a theoretical exploration

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JournalEconomics Letters
DateE-pub ahead of print - 8 Jan 2012
DatePublished (current) - Jun 2012
Issue number3
Volume115
Number of pages4
Pages (from-to)348-351
Early online date8/01/12
Original languageEnglish

Abstract

This paper proposes an analytical framework to examine the role of public debt in financial development, which remains largely unexplored in the existing literature. We find that in countries where the banking sector extends substantial credit to government, public debt is likely to harm financial development, with unfavourable implications for economic activity. As such, our results provide an alternative explanation for the ‘contractionary fiscal expansions’. We also show that the lower the financial depth, the greater the adverse effects of public borrowing on financial development and macroeconomic outcomes.
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