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Sources of Debt Accumulation in a Small Open Economy

Author

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  • Mr. Abdelhak S Senhadji

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.

Suggested Citation

  • Mr. Abdelhak S Senhadji, 1997. "Sources of Debt Accumulation in a Small Open Economy," IMF Working Papers 1997/146, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1997/146
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    Citations

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    Cited by:

    1. Boileau, Martin & Normandin, Michel, 2008. "Dynamics of the current account and interest differentials," Journal of International Economics, Elsevier, vol. 74(1), pages 35-52, January.
    2. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, February.
    3. Hyeon‐Seung Huh & Tadashi Inoue & Hyun‐Hoon Lee, 2010. "Optimal Foreign Borrowing Revisited," The Japanese Economic Review, Japanese Economic Association, vol. 61(3), pages 367-381, September.
    4. Pancrazi, Roberto & Prosperi, Lorenzo, 2020. "Transparency, political conflict, and debt," Journal of International Economics, Elsevier, vol. 126(C).
    5. Nason, James M. & Rogers, John H., 2006. "The present-value model of the current account has been rejected: Round up the usual suspects," Journal of International Economics, Elsevier, vol. 68(1), pages 159-187, January.
    6. Nooman Rebei & Steven Ambler & Ali Dib, 2004. "Optimal Taylor Rules in an Estimated Model of a Small Open Economy," Econometric Society 2004 North American Summer Meetings 627, Econometric Society.
    7. Douch, Mohamed, 2004. "Equity Premiums In Small Open Economy," MPRA Paper 14613, University Library of Munich, Germany.
    8. Muhanji, Stella & Ojah, Kalu & Soumaré, Issouf, 2019. "How do natural resource endowment and institutional quality influence the nexus between external indebtedness and welfare in Africa?," Economic Systems, Elsevier, vol. 43(1), pages 77-98.
    9. Martin Boileau & Michel Normandin, 2004. "The Current Account and the Interest Differential in Canada," Cahiers de recherche 0424, CIRPEE.
    10. Kollmann, Robert, 2002. "Monetary policy rules in the open economy: effects on welfare and business cycles," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 989-1015, July.
    11. Steve Ambler & Ali Dib & Nooman Rebei, 2003. "Nominal Rigidities and Exchange Rate Pass-Through in a Structural Model of a Small Open Economy," Staff Working Papers 03-29, Bank of Canada.
    12. Ester Faia, 2007. "Welfare Implications of Capital Account Liberalization," CEIS Research Paper 92, Tor Vergata University, CEIS.
    13. Benoît Carmichael & Sikoro Keita & Lucie Samson, 1999. "Liquidity Contraints and Business Cycles in Developing Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 370-402, April.
    14. Muhanji, Stella & Ojah, Kalu, 2011. "External shocks and persistence of external debt in open vulnerable economies: The case of Africa," Economic Modelling, Elsevier, vol. 28(4), pages 1615-1628, July.
    15. Muhanji, Stella & Malikane, Christopher & Ojah, Kalu, 2013. "Price and liquidity puzzles of a monetary shock: Evidence from indebted African economies," Economic Modelling, Elsevier, vol. 33(C), pages 620-630.
    16. Eva Ortega & Nooman Rebei, 2006. "The Welfare Implications of Inflation versus Price-Level Targeting in a Two-Sector, Small Open Economy," Staff Working Papers 06-12, Bank of Canada.
    17. Kollmann, Robert, 2002. "Monetary Policy Rules in a Two-Country World," MPRA Paper 70347, University Library of Munich, Germany.
    18. Dumitriu, Ramona & Stefanescu, Razvan, 2013. "External debt management in Romania," MPRA Paper 52475, University Library of Munich, Germany, revised 25 Sep 2013.

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