Foreign debt, economic growth and economic crisis

Abstract

PurposeThe purpose of this paper is to examine the relationship between foreign debt, economic growth and economic crisis.Design/methodology/approachThis paper constructs a Ramsey‐Cass‐Koopmans model theoretically and examines empirically the relationship between foreign debt, economic growth and economic crisis using US data over the period of 2003 and 2008.FindingsThe paper finds that if the debt transformation rate is low when the debt ratio rises over a certain point; economic growth will be hindered, and may even trigger economic crisis. In contrast, high debt transformation rate may facilitate economic growth. However, the paper also shows that when the debt ratio exceeds a certain point, the debt will become a barrier to economic growth. These results will be of interest to policy makers not only in developed countries but also in emerging economies such as China.Originality/valueThese findings suggest that the relationship between debt, economic growth and economic crisis is not uniform, but depends on debt transformation rate.