Abstract
This paper analyses a small open economy with overlapping generations, endogenous growth, and a risk premium on foreign debt. A balanced-budget increase in public consumption or a rise in government debt raises the ratio of foreign debt to domestic income and the interest rate, but depresses economic growth. Supply-side policies aimed at internalising production externalities boost foreign indebtedness, the interest rate, and economic growth. A higher global interest rate leads, if initial foreign indebtedness is not too large, to a lower foreign debt and, if a country is dragged down by large levels of foreign debt, lower economic growth.
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