A Simple Model of Capital Imports
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.
|Date of creation:||13 Oct 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Hefeker, Carsten & Busse, Matthias, 2005. "Political Risk, Institutions and Foreign Direct Investment," HWWA Discussion Papers 315, Hamburg Institute of International Economics (HWWA).
- 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.
- Valerija Botrić & Lorena Škuflić, 2006. "Main Determinants of Foreign Direct Investment in the Southeast European Countries," Transition Studies Review, Springer, vol. 13(2), pages 359-377, 07.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:25888. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.