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International Borrowing to Finance Investment

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  • Charles Engel
  • Kenneth M. Kletzer

Abstract

The motives of a small country for borrowing to purchase capital equipment on international markets are studied. The country produces tradable capital and a nontradable consumption good and borrows or lends capital to achieve higher levels of welfare. A shift in time-preference favoring future over current consumption has an ambiguous impact effect on foreign debt. Whether the country lends or borrows immediately depends upon whether the consumption goods sector is capital or labor intensive. The dynamic behavior of the current account for an initially capital-poor country is also derived. Our results contrast with those of previous studies of optimal indebtedness in which consumables are borrowed directly.

Suggested Citation

  • Charles Engel & Kenneth M. Kletzer, 1986. "International Borrowing to Finance Investment," NBER Working Papers 1865, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1865
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    Cited by:

    1. Engel, Charles & Kletzer, Kenneth, 1989. "Saving and Investment in an Open Economy with Non-traded Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 735-752, November.

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