A Simple Model of Capital Imports

Arif, Shawky (2010): A Simple Model of Capital Imports. Unpublished.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: External borrowing, External debt, Dynamic optimization
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods and Programming > C61 - Optimization Techniques; Programming Models; Dynamic Analysis; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

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