OPTIMAL FOREIGN BORROWING REVISITED |
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| Authors: | HYEON‐SEUNG HUH TADASHI INOUE HYUN‐HOON LEE |
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| Institution: | 1. Yonsei University;2. Acknowledgements: Earlier versions of this paper were presented at the Annual Conference of the Asia–Pacific Economic Association, Hitotsubashi University, Japan, in July 2005;3. at the Annual Japan Applied Economics Conference, Hiroshima Shudo University, in November 2006;4. and at the Annual Oxford Business and Economics Conference, John Hugh's College, Oxford in July 2007. We are grateful to Professor Keisuke Osumi of Kyushu University and the participants for their useful comments. The comments and helpful criticism received from the anonymous referee of this journal are also gratefully acknowledged. All errors are our own.;5. Hiroshima Shudo University;6. Kangwon National University |
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| Abstract: | Foreign capital has become increasingly important in financing investment and growth in developing countries. Foreign capital flows, however, can be volatile as is evident from the recent financial crises. It has also recently been noted by researchers that there is little systematic empirical evidence that foreign capital contributes to the economic growth of developing countries. In this context, this paper attempts to theoretically reevaluate the borrowing behaviour of a developing economy that relies on foreign borrowing for its capital formation. In particular, this paper investigates the implications of different lending policies of international financial institutions. It is found that no matter whether the borrowing interest rate increases with the level of foreign debt per capita or with the foreign‐capital/total‐capital ratio, the economy always moves toward the stationary state. The result holds even when the representative agent regards the interest rate given as constant. This implies that foreign borrowing does help economic growth, irrespective of lending policies of international financial institutions. |
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| Keywords: | C61 F34 F43 |
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