Sources of Debt Accumulation in a Small Open Economy

26 Pages Posted: 15 Feb 2006

Date Written: October 1997

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.

Keywords: Debt Accumulation, Stochastic Dynamic General Equilibrium Model, External Shocks, Incomplete Information, Developing Countries

JEL Classification: F41, 016, D58, G15

Suggested Citation

Senhadji, Abdelhak S., Sources of Debt Accumulation in a Small Open Economy (October 1997). IMF Working Paper No. 97/146, Available at SSRN: https://ssrn.com/abstract=882716

Abdelhak S. Senhadji (Contact Author)

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

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