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On Optimal Foreign Borrowing

Author

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  • Seung-Gwan Baek

    (Hongik University)

Abstract

This paper derives an optimal borrowing rule from an intertemporal optimizing model in which uncertainty and risk premium are explicitly incorporated. The optimal borrowing rule is that the risk-adjusted marginal product of capital, net of depreciation, must be equal to the risk-adjusted, country-specific risk premium-adjusted interest rate of borrowing. The key difference between the optimal borrowing rule in earlier studies and the revised rule is that optimality criteria in foreign indebtedness should be associated with the agent's risk aversion and the size of the stochastic disturbances in profit flows. The revised rule demonstrates that uncertainties may play an important role in deciding the relationship between capital stock and foreign debt stock and between domestic saving and foreign saving in heavily indebted economies.

Suggested Citation

  • Seung-Gwan Baek, 2002. "On Optimal Foreign Borrowing," Korean Economic Review, Korean Economic Association, vol. 18, pages 215-231.
    • Handle: RePEc:kea:keappr:ker-200212-18-2-01
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    More about this item

    Keywords

    Optimal borrowing; uncertainty; risk premium;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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