Working Paper: NBER ID: w1865
Authors: Charles Engel; Kenneth 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.
Keywords: international borrowing; capital investment; time preference; economic welfare
JEL Codes: F34; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift in time preference (D15) | foreign debt (F34) |
| capital intensity of consumption goods sector (E20) | borrowing behavior (G51) |
| increase in future preference (D15) | immediate foreign lending (F34) |
| increase in future preference (D15) | international borrowing (F34) |
| capital-poor country borrowing (F34) | becoming net owners (D85) |
| labor-intensive consumption sector (E20) | increased foreign indebtedness (F65) |
| capital-intensive consumption sector (E20) | reduced foreign indebtedness (F34) |