OPTIMAL FOREIGN BORROWING REVISITED

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 evide...

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Published inJapanese economic review (Oxford, England) Vol. 61; no. 3; pp. 367 - 381
Main Authors HUH, HYEON-SEUNG, INOUE, TADASHI, LEE, HYUN-HOON
Format Journal Article
LanguageEnglish
Published Melbourne, Australia Blackwell Publishing Asia 01.09.2010
Springer Singapore
Japanese Economic Association
Springer Nature B.V
SeriesThe Japanese Economic Review
Subjects
Borrowing
C61
Capital
Developing countries
Development Economics
Econometrics
Economic growth
Economic History
Economic theory
Economics
External debt
F34
F43
Financial crisis
Financial institutions
Foreign capital
Interest rates
International finance
International lending
LDCs
Loans
Macroeconomics/Monetary Economics//Financial Economics
Microeconomics
Public debt
Studies
F43
F34
C61
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Summary: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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ArticleID:JERE490
Acknowledgements: Earlier versions of this paper were presented at the Annual Conference of the Asia–Pacific Economic Association, Hitotsubashi University, Japan, in July 2005; at the Annual Japan Applied Economics Conference, Hiroshima Shudo University, in November 2006; 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.
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ISSN:1352-4739
1468-5876
DOI:10.1111/j.1468-5876.2009.00490.x