Abstrakt
The economies of developing countries to a great extent rely on external sources of financing. High dependence on international capital flows magnifies countries' exposure to external economic fluctuations especially to global investment sentiments.
The aim of this study is to analyze the impact of fluctuations of external borrowings on welfare of a developing economy. A DSGE model with immobile physical capital calibrated to a typical developing country shows significant substitutability between domestic physical capital and external borrowings.
Given that external borrowings were unstable reliance on foreign financing can magnify short-run fluctuations in output and consumption. Welfare costs of fluctuations of external debt for an average developing country by far exceed the costs found for business cycles in developed countries.
The estimate of costs of fluctuations found in this study is equal to 2.2% of life-time consumption stream.