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A Simple Model of Capital Imports

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  • Arif, Shawky
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    Abstract

    Following Ramsey (1928) theoretical framework, this paper develops a dynamic model where a community is assumed to be importing two forms of foreign capital: external debt and foreign direct investment (FDI). The community is assumed to derive utility from consumption of goods and positive externalities of FDI, while deriving disutility from negative externalities of external borrowing. Results suggest that: first, a higher disutility of debt implies a higher shadow interest rate.1 The higher the utility derived from FDI, however, the lower the shadow interest rate. Second, external borrowing will be attractive as long as the relevant interest rate is less or equal to the net marginal product of capital. Third, the study of the social optimum shows that the externalities that arise from foreign capital do not affect the steady state which is always a saddle point.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25888.

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    Date of creation: 13 Oct 2010
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    Handle: RePEc:pra:mprapa:25888

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    Keywords: External borrowing; External debt; Dynamic optimization;

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    1. Olivier Jean Blanchard, 1983. "Debt and the Current Account Deficit in Brazil," NBER Chapters, in: Financial Policies and the World Capital Market: The Problem of Latin American Countries, pages 187-198 National Bureau of Economic Research, Inc.
    2. Busse, Matthias & Hefeker, Carsten, 2007. "Political risk, institutions and foreign direct investment," European Journal of Political Economy, Elsevier, vol. 23(2), pages 397-415, June.
    3. Valerija Botrić & Lorena Škuflić, 2006. "Main Determinants of Foreign Direct Investment in the Southeast European Countries," Transition Studies Review, Springer, Springer, vol. 13(2), pages 359-377, 07.
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