Growth, External Debt Constraints and Budgetary Policies

This paper extends MURPHY's (1991) analysis of alternative lending arrangements. We incorporate the capital accumulation into the two sector model and departure from traditional model of this kind by making two assumptions. One of them is to postulate rigid wage and unemployment, and the another is to assume sector-specic capital goods. We analyze then the long-run behavior and the short-run adjustment path for macroeconomic variables such as stock of external debt, real exchange rate, capital stocks, investment and private consumption of a small developing country in response to dierent budgetary policy changes under three alternative lending arrangements. The results suggest that, rst, the behavior of the economic system under total debt and debt-ratio arrangements are the same in the long-run and not very dierent in the short- and intermediate-run; secondly, the budgetary policies can have an inuence over the external debt in the short- and intermediate-run under the total debt ratio arrangement.