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Doctor of Philosophy




Ramanarayanan, Ananth

2nd Supervisor

Cociuba, Simona



My thesis consists of three chapters: two chapters on the effects of financial shocks, and one on the relationship between external debt and economic growth in low- and middle-income countries.

Chapter 1, “Financial Shocks, Interbank Rates and Corporate Rates”, introduces financial shocks that change interbank and corporate debt rates and their spread and shows how these shocks affect economic fluctuations.

Chapter 2, “Tighter Debt Limits, Default, and Labour Supply”, shows that the effect of tighter debt limits on households' labour supply decisions depends on whether default is allowed or not.

Chapter 3, “External Debt, Initial Conditions, and Economic Growth in Low- and Middle-Income Countries”, looks at the external debt-growth relationship from a new angle and shows that where an economy starts relative to its long-run average output per capita affects the direction of this relationship.

Summary for Lay Audience

Companies rely on debt as a source to fund their operations. Consequently, it is expected that the cost of debt affects firms’ decisions, like hiring and production. The rates paid on many corporate debt instruments are based on a benchmark rate like an interbank rate. This suggests that the interplay between corporate debt and interbank rates may have wider implications on the economy by affecting firms’ decisions as mentioned.

Therefore, in Chapter 1, I study the movement of interbank and corporate debt rates, then I ask how do changes in these rates and their spread (the difference between them) affect economic fluctuations? I find that changes in these rates and their spread can generate economic fluctuations like what is observed in the United States (US) in the past few decades. This highlights the importance of fluctuations in the financial sector as a source of wider economic fluctuations.

Further, changes in the financial sector can affect households’ decisions by affecting their ability to borrow. During the financial crisis that started in 2007, it became more difficult to borrow from banks in the US and elsewhere. Meanwhile, there was an increase in bankruptcy filings and a decrease in hours worked in the US.

Therefore, in Chapter 2, I ask how does tightening debt limits affect households’ labour supply decisions when they are allowed to file for bankruptcy? I find that following a decrease in debt limits, households who file for bankruptcy decrease their hours worked. If they were not allowed to file for bankruptcy, they increase their hours worked.

Like firms and households, countries require funds. In low- and middle-income countries, external debt is an important source of funding. World Bank data show that external debt increased significantly in this group of countries since 1970.

In Chapter 3, I ask about the relationship between external debt and economic growth in low- and middle-income countries and look at this relationship from a new angle. I find that when an economy starts with income per person lower than its long-run average, external debt is more likely to be positively related with economic growth.

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Economics Commons