Arif, Shawky (2010): A Simple Model of Capital Imports.
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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 |
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Original Title: | A Simple Model of Capital Imports |
Language: | English |
Keywords: | External borrowing, External debt, Dynamic optimization |
Subjects: | C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > 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, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity |
Item ID: | 25888 |
Depositing User: | Shawky Arif |
Date Deposited: | 16 Oct 2010 11:30 |
Last Modified: | 29 Sep 2019 00:05 |
References: | Blanchard, O. J. (1983). Debt and the current account deficit in brazil. In P. A. Armella et al. (Eds.), Financial Policies and the World Capital Market: The Problem of Latin American Countries, pp. 187–197. University of Chicago Press. Botric, V. and L. Skuflic (2006). Main determinants of foreign direct investment in the southeast european countries. Transition Studies Review 13, 359–377. Busse, M. and C. Hefeker (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy 23 (2), 397–415. Pranab, B. K. (1967). Optimal foreign borrowing. In K. Shell (Ed.), Essays on the Theory of Optimal Economic Growth, Chapter 6, pp. 117–128. MIT Press. Ramsey, F. P. (1928). A mathematical theory of saving. The Economic Journal 38 (152), 543–559. UNCTAD (2008). Development and globalization: Facts and figures. Technical report, The United Nations. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/25888 |