Optimal foreign borrowing revisited

Hyeon Seung Huh, Tadashi Inoue, Hyun Hoon Lee

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

Foreign capital has become increasingly important in financing investment and growth in developing countries. Foreign capital flows, however, can be volatile as is evident from the recent financial crises. It has also recently been noted by researchers that there is little systematic empirical evidence that foreign capital contributes to the economic growth of developing countries. In this context, this paper attempts to theoretically reevaluate the borrowing behaviour of a developing economy that relies on foreign borrowing for its capital formation. In particular, this paper investigates the implications of different lending policies of international financial institutions. It is found that no matter whether the borrowing interest rate increases with the level of foreign debt per capita or with the foreign-capital/total-capital ratio, the economy always moves toward the stationary state. The result holds even when the representative agent regards the interest rate given as constant. This implies that foreign borrowing does help economic growth, irrespective of lending policies of international financial institutions.

Original languageEnglish
Pages (from-to)367-381
Number of pages15
JournalJapanese Economic Review
Volume61
Issue number3
DOIs
Publication statusPublished - 2010 Sep

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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