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Effects of External Debt on Domestic Resource Allocation in a Small Open Economy with Limited Access to the World Capital Market

Author

Listed:
  • Fujiki, Hiroshi

    (Institute for Monetary and Econ Studies, Bank of Japan)

  • Watanabe, Kiyoshi

    (Institute for Monetary and Econ Studies, Bank of Japan)

Abstract

This paper studies a small open economy with a large external debt. It begins by considering the long-term effects of shocks in the international capital market and domestic fiscal policy on the amount of outstanding external debt and the domestic reallocation of resources between the tradable and non-tradable goods sectors theoretically. Then, numerical examples on various shocks are illustrated to help understand those theoretical predictions. For example, an exogenous increase in government expenditures, together with an increase in the external borrowing rate, requires resource reallocation between the tradable goods sector and the non-tradable goods sector as well as a small amount of external borrowings to shift toward the new stationary equilibrium, whose welfare level worsens.

Suggested Citation

  • Fujiki, Hiroshi & Watanabe, Kiyoshi, 2003. "Effects of External Debt on Domestic Resource Allocation in a Small Open Economy with Limited Access to the World Capital Market," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 21-56, December.
    • Handle: RePEc:ime:imemes:v:21:y:2003:i:4:p:21-56
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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