{
  "title": "Sources of Debt Accumulation in a Small Open Economy",
  "publication": "IMF Working Papers, October 1, 1997",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/sources-of-debt-accumulation-in-a-small-open-economy-2371",
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  "summary": "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.",
  "sections": [
    {
      "heading": "Research question and context",
      "content": "- Analyzes the borrowing behavior of a small open economy of a developing country that:\n  - relies heavily on imports for its capital formation;\n  - faces an upward-sloping supply function of foreign loans.\n- Decision makers in the model face uncertainty about the longevity of external shocks, generating forecast errors that affect borrowing."
    },
    {
      "heading": "Core findings",
      "content": "- Uncertainty about the persistence (longevity) of external shocks generates forecast errors that lead to substantial debt accumulation.\n- Modeling the foreign loan market with an upward-sloping supply function (rather than the usual perfectly elastic supply) provides a more realistic formulation for developing countries.\n- The upward-sloping supply function offers an alternative to the Uzawa-type utility function for analyzing asset accumulation within the small open economy framework."
    },
    {
      "heading": "Methodology and model features",
      "content": "- Framework: small open economy model for a developing country.\n- Key model ingredients:\n  - Heavy reliance on imports for capital formation.\n  - Upward-sloping supply function of foreign loans.\n  - Uncertainty regarding the duration of external shocks (incomplete information).\n  - Use of a Stochastic Dynamic General Equilibrium Model (implied by keywords)."
    },
    {
      "heading": "Policy-relevant implications",
      "content": "- Recognition that imperfectly elastic access to foreign loans can be an important driver of external debt dynamics in developing countries.\n- Attention to information and forecasting about external shocks is critical: forecast errors about shock persistence can materially increase debt accumulation.\n- Modeling choices about the foreign loan supply curve (upward-sloping vs. perfectly elastic) materially affect analysis of debt dynamics and may imply different policy responses to external shocks and borrowing.\n\n---\n\n Content in this bundle\n\n- Souces of Debt Accumulation in a Small Open Economy - WP/97/146\n  - Souces of Debt Accumulation in a Small Open Economy - WP/97/146 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Souces of Debt Accumulation in a Small Open Economy - WP/97/146 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/sources-of-debt-accumulation-in-a-small-open-economy-2371"
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    "Authors: Abdelhak S Senhadji",
    "Published: October 1, 1997",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451856606.001",
    "Analyzes the borrowing behavior of a small open economy of a developing country that:",
    "Decision makers in the model face uncertainty about the longevity of external shocks, generating forecast errors that affect borrowing.",
    "Uncertainty about the persistence (longevity) of external shocks generates forecast errors that lead to substantial debt accumulation.",
    "Modeling the foreign loan market with an upward-sloping supply function (rather than the usual perfectly elastic supply) provides a more realistic formulation for developing countries.",
    "The upward-sloping supply function offers an alternative to the Uzawa-type utility function for analyzing asset accumulation within the small open economy framework.",
    "Framework: small open economy model for a developing country.",
    "Key model ingredients:",
    "Recognition that imperfectly elastic access to foreign loans can be an important driver of external debt dynamics in developing countries.",
    "Attention to information and forecasting about external shocks is critical: forecast errors about shock persistence can materially increase debt accumulation.",
    "Modeling choices about the foreign loan supply curve (upward-sloping vs. perfectly elastic) materially affect analysis of debt dynamics and may imply different policy responses to external shocks and borrowing.",
    "**Souces of Debt Accumulation in a Small Open Economy - WP/97/146**"
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