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A two-sector intertemporal optimizing model of capital accumulation and external indebtedness

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  • Nunes, Luiz Paulo Marinho

Abstract

An intertemporal optimizing model for a small open economy is developed to study the dynamic interaction between capital accumulation and external indebtedness and the steady-state relation between the size of the capital stock and the level of external indebtedness. The analysis shows that in a context of growth, persistent current-account imbalances may result as the outcome of optimal behavior on the part of intertemporal maximizing agents. However, it is shown that by incurring external debt to partially finance its gro wth effort, the economy places itself on a constrained growth path that ultimately affects the optimal level of the steady-state capital stock.

Suggested Citation

  • Nunes, Luiz Paulo Marinho, 1986. "A two-sector intertemporal optimizing model of capital accumulation and external indebtedness," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 6(1), April.
    • Handle: RePEc:sbe:breart:v:6:y:1986:i:1:a:3118
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    1. Obstfeld, Maurice, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1142-1161, December.
    2. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
    3. Michael Mussa, 1982. "Government Policy and the Adjustment Process," NBER Chapters, in: Import Competition and Response, pages 73-122, National Bureau of Economic Research, Inc.
    4. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    5. David Lipton & Jeffrey Sachs, 1980. "Accumulation and Growth in a Two-Country Model: A Simulation Approach," NBER Working Papers 0572, National Bureau of Economic Research, Inc.
    6. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
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