Essays on growth of a small open economy in an imperfect international capital market: Theory and evidence.

摘要

In the literature of open macroeconomics, it is argued that capital account liberalization of a small open developing economy accelerates its growth via lowered borrowing cost which enables faster accumulation of physical capital. However, many researchers have posed a question on the conventional assumption of the risk-free world interest rate represented by a perfectly elastic foreign debt supply schedule. Using a continuous-time stochastic general equilibrium model, we investigate the determinants of foreign debt supply curve and their effects on the default-risk premium. Our findings are: (i) The foreign-debt supply schedule is an S-shaped upward sloping curve, characterized by volatilities of domestic output growth and real exchange rate depreciation, term to maturity, and relative size of debt measured by debt-capital ratio; (ii) The real exchange rate volatility exerts a larger effect on the risk premium than the volatility of domestic output growth does; (iii) The curvature of the short-term debt supply schedule is larger than that of the long-term one, i.e., flatter in the beginning and steeper later on. Therefore, without careful debt management policies, agents' underestimation of borrowing costs may lead a small open economy to a dangerous situation---debt crisis and painful restructuring process. From panel regressions of 20 developing countries over a sample period of 42 quarters between 1994 and 2004, we find empirical evidence that supports the characteristics of the interest-premium function in our model.; As an application of the basic model, we extend the inelastic foreign debt supply model, incorporating an additional source of foreign capital inflows, foreign direct investment (FDI). We show that, the introduction of FDI is only welfare-improving, while the lowered borrowing cost from international capital market accelerates the growth of wealth.