Macroeconomic Dynamics and Optimal External Borrowing in an Imperfect World Capital Market.

This paper investigates optimal external borrowing in an open economy that faces an imperfect world capital market. As the country expands its indebtness, it must pay higher real interest rates. The focus on the role of interest rates is justified by the fact that they have increased the debt-servicing burden for LDCs. Under this structure, the paper studies the endogenous dynamics of borrowing, current account, output, and consumption from the point of view of solvency. It also examines the response of these dynamics to policy changes in developing countries that put an upward pressure on world interest rates. Copyright 1991 by Blackwell Publishers Ltd and The Victoria University of Manchester