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Chung, Keunsuk
School of Business Administration
Research Interests
  • International Macroeconomics

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Foreign Debt, Foreign Direct Investment and Volatility

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Title
Foreign Debt, Foreign Direct Investment and Volatility
Author
Chung, Keunsuk
Keywords
Foreign debt; Foreign direct investment; Inelastic debt supply; Volatility
Issue Date
201006
Publisher
Routledge
Citation
INTERNATIONAL ECONOMIC JOURNAL, v.24, no.2, pp.171 - 196
Abstract
We investigate how foreign debt and foreign direct investment (FDI) affect the growth and welfare of a stochastically growing small open economy. First, we find that foreign debt influences the growth of domestic wealth by lowering the cost of capital, while FDI affects the country’s welfare by providing an additional source of permanent income. Second, a decline in domestic investment may improve domestic welfare as FDI replaces the gap. Even when the welfare deteriorates, its magnitude is mitigated, leaving more room for discretionary fiscal policy. Third, a fiscal policy aimed to stabilize domestic output fluctuations needs to be conducted not to crowd out the welfare benefit of FDI too much. Fourth, an economy with both types of foreign capital experiences wider welfare swings by external volatility shocks than the one with foreign debt alone, while the welfare effects from domestic volatility shocks are mitigated. The welfare effects of fiscal shocks are much smaller with both types of foreign capital. Lastly, the first-best labor income tax covers the government absorption by the labor’s share of total output, and the capital income tax covers the rest. Investment is penalized or subsidized depending on the social marginal cost-gain differential.
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DOI
http://dx.doi.org/10.1080/10168731003649628
ISSN
1016-8737
Appears in Collections:
SBA_Journal Papers

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