Sources of Debt Accumulation in a Small Open Economy

Abdelhak Senhadji

No 1997/146, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes the borrowing behavior of a small open economy of a developing country that relies heavily on imports for its capital formation and faces an upward-sloping supply function of foreign loans. Decision makers face uncertainty about the longevity of external shocks. That uncertainty generates forecast errors that lead to substantial debt accumulation. It is found that the assumption of an upward-sloping supply function of foreign loans, which is a more realistic formulation for developing countries than the usual perfect elasticity, offers an alternative to the Uzawa-type utility function for analyzing asset accumulation in the small open economy framework.

Keywords: WP; interest rate; Debt Accumulation; Stochastic Dynamic General Equilibrium Model; External Shocks; Incomplete Information; Developing Countries; world interest rate; terms of trade shock; business cycle; open economy; debt level; Terms of trade; Real interest rates; Exports; Imports (search for similar items in EconPapers)
Pages: 26
Date: 1997-10-01
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Citations: View citations in EconPapers (27)

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