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David Hauner| Journal of Development Economics| January 01, 2008

Public Debt and Financial Development

Public| Printed: Yes

This paper studies the role of public debt in financial development. A "safe asset" view suggests public debt is supportive of financial development as it provides collateral and benchmark. A "lazy banks" view suggests public debt hampers financial development, as it makes banks more profitable but less efficient in developing economies. Statistical analysis favors the lazy banks view, though there is also evidence for the safe asset view.