Public debt and financial development: a theoretical exploration

TY - JOUR

T1 - Public debt and financial development

T2 - a theoretical exploration

AU - Ismihan, Mustafa

AU - Ozkan, Gulcin

PY - 2012/6

Y1 - 2012/6

N2 - 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. Download Info

AB - 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. Download Info

UR - http://www.scopus.com/inward/record.url?scp=84856028125&partnerID=8YFLogxK

U2 - 10.1016/j.econlet.2011.12.040

DO - 10.1016/j.econlet.2011.12.040

M3 - Article

SN - 0165-1765

VL - 115

SP - 348

EP - 351

JO - Economics Letters

JF - Economics Letters

IS - 3

ER -