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International Borrowing to Finance Investment

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  • Charles Engel
  • Kenneth M. Kletzer

Abstract

The motives of a small country for borrowing to purchase capital equipment on international markets are studied. The country produces tradable capital and a nontradable consumption good and borrows or lends capital to achieve higher levels of welfare. A shift in time-preference favoring future over current consumption has an ambiguous impact effect on foreign debt. Whether the country lends or borrows immediately depends upon whether the consumption goods sector is capital or labor intensive. The dynamic behavior of the current account for an initially capital-poor country is also derived. Our results contrast with those of previous studies of optimal indebtedness in which consumables are borrowed directly.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1865.

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Date of creation: Mar 1986
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Handle: RePEc:nbr:nberwo:1865

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  1. Bazdarich, Michael J., 1978. "Optimal growth and stages in the balance of payments," Journal of International Economics, Elsevier, Elsevier, vol. 8(3), pages 425-443, August.
  2. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 141-53, February.
  3. Fischer, Stanley & Frenkel, Jacob A., 1972. "Investment, the two-sector model and trade in debt and capital goods," Journal of International Economics, Elsevier, Elsevier, vol. 2(3), pages 211-233, August.
  4. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1142-61, December.
  5. Findlay, Ronald, 1978. "An "Austrian" Model of International Trade and Interest Rate Equalization," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 989-1007, December.
  6. Neary, J Peter, 1978. "Short-Run Capital Specificity and the Pure Theory of International Trade," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 88(351), pages 488-510, September.
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Cited by:
  1. Charles Engel & Kenneth Kletzer, 1987. "Saving and Investment in an Open Economy with Non-Traded Goods," NBER Working Papers 2141, National Bureau of Economic Research, Inc.

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