CFCM 14/02: A non-monotonic relationship between public debt and economic growth: the effect of financial monopsony

Abstract

There is some evidence of a non-monotonic relationship between public debt and economic growth. With reference to the Diamond (1965) OLG model, we provide a rationale for this possibility; (i) where the financial sector is monopsonistic; (ii) where the acquisition of its equity constitutes a form of non-productive saving; (iii) where public debt has a fixed price form. As a competing asset, the issuance of debt reduces financial profits and equity values and, possibly, over an initial range, the sum of non-productive saving, comprising public debt and financial sector equity, thereby leading to a net crowding-in effect.

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This paper has been  Published Online: 2017-06-09 | BE Journal of Macroeconomics 

Authors

Mark Roberts

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