BUDGETARY POLICIES, FOREIGN INDEBTEDNESS, THE STOCK-MARKET, AND ECONOMIC-GROWTH

This paper analyses a small open economy with overlapping generations, endogenous growth, anti a risk premium on foreign debt. A balanced-bu dget increase in public consumption or a rise in government debt raise s the ratio Of foreign debt to domestic income and the interest rare, but depresses economic growth, Supply-side policies aimed at internali sing production externalities boost foreign indebtedness, the interest rate, and economic growth. A higher global interest rate leads, if in itial foreign indebtedness is not too large, to a lower foreign debt a nd, if a country is dragged down by large levels of foreign debt, lowe r economic growth.