The effects of foreign borrowing policies on economic growth: Success or failure?

Foreign savings closely interact with economic performance. External loans are partly influenced by the government's attempt to balance its budget. This study investigates the relationship between public sector foreign borrowing and economic growth. Results indicate that only under circumstances of (1) moderate income tax rates to guarantee the solvency of external loans and (2) households having the patience to substitute consumption between different periods can domestic government finance fiscal deficits by borrowing abroad, and thereby enhance investment and economic growth. Otherwise, additional foreign borrowing is associated with higher indebtedness and slower economic growth.