Energy prices,substitution, and optimal borrowing in the short run: An analysis of adjustment in oil importing developing countries

The paper discusses optimal short-term borrowing in response to an increase in the price of imported inputs. The rationale for borrowing lies in the increase in substitution possibilities in production (between imported and domestic inputs) and in consumption (between traded and non-traded goods) as the economy adjusts its structure to the new prices. A typology of LDCs and the oil price increases in the 70's are used to illustrate the results of the model, which are compared with the actual increase in borrowing during the period.