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Real Interest Rates, Home Goods, and Optimal External Borrowing

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  • Rudiger Dornbusch

Abstract

The paper investigates the optimal tire path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rates. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home gods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in interest rates.

Suggested Citation

  • Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0779
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    1. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(2), pages 251-270.
    2. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-577, September.
    3. Dornbusch, Rudiger, 1985. "Intergenerational and international trade," Journal of International Economics, Elsevier, vol. 18(1-2), pages 123-139, February.
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