Public debt and financial development: a theoretical exploration

Mustafa Ismihan, Gulcin Ozkan

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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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Original languageEnglish
Pages (from-to)348-351
Number of pages4
JournalEconomics Letters
Issue number3
Early online date8 Jan 2012
Publication statusPublished - Jun 2012

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