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Title: |
An Interest Rate Shock on a Small Debtor
Economy with Installation Costs of Investment |
| Author: |
Cha, Baekin |
| Author
Affiliation: |
U TX |
| Source: |
International Economic Journal, Autumn 1992, v. 6, no. 3, pp. 21-36 |
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Publication Date: |
Autumn 1992 |
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Abstract: |
This paper generalizes the O. Blanchard-S.
Fischer model (1989) for a small open economy with installation costs of
investment. By allowing the divergence of the subjective time preference
rate and the world interest rate, the model avoids a constant
consumption path which is neither feasible nor desirable for a small
growing economy. While the divergence does not define an usual steady
state equilibrium, the installation costs of investment lead the economy
to the point at which foreign borrowing is entirely used for the
consumption purpose while avoiding infinite borrowing. The intrinsic
dynamic responses of the model to an unexpected world interest rate
shock is then analyzed. |
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