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On the Terms of Trade Deterioration in a Small Open
Developing Economy with External Debt
Mark Assibey-Yeboah
Mohammed Mohsin
Ghana Institute of Management
Department of Economics
& Public Administration
The University of Tennessee
P.O. Box AH 50, Achimota
Knoxville, TN 37996
GHANA
USA
October 2009
Abstract
We examine the e¤ects of adverse terms of trade in a small open developing economy
with external debt and sovereign risk. The risk premium on foreign debt depends
on the debt-income ratio. Adverse terms of trade decreases permanent income of the
representative agent. This leads to a fall in leisure and an increase in employment.
Higher employment increases the marginal productivity of capital, thereby inducing
further investment. A higher output helps the economy to accumulate more foreign
debt. This is possible due to improved creditworthiness of the economy. The current account position of the economy also deteriorates. This is consistent with the
Harberger-Laursen-Metzler e¤ect.
JEL Classi…cations: F32, F41
Keywords: Terms of Trade, External Debt, Risk Premium.
1
Introduction
A characteristic feature of small open economies is their openness to international trade,
which has become increasingly important in the face of globalization. But there are concerns
Corresponding author. Tel.: +1 865-974-1690; fax: +1 865-974-4601. E-mail address: [email protected]
(M. Mohsin). We sincerely thank Bandi Kamaiah and Debashis Acharaya for constructive comments and
encouragements. The usual disclaimer applies.
1
about the unevenness of the process of globalization. One such concern is the fact that most
developing countries are vulnerable to adverse terms of trade shocks. Typically, developing
countries specialize in exports of a few primary commodities. Persistent terms of trade
‡uctuations arise as a result of exports that are not diversi…ed, as well as low income and
price elasticities of demand. These terms of trade ‡uctuations in primary commodities have
had signi…cant impacts on business cycles in developing countries. In this paper, we study
the e¤ects of adverse terms of trade (ToT) on the macro economy. We are particularly
interested in how consumption, employment, investment, and external debt are a¤ected by
a terms of trade shock.
The relative price of exports in terms of imports is known as the terms of trade. The
e¤ects of terms of trade shocks on the current account balance have remained an important
issue in open economy macroeconomics. The classic analysis is o¤ered by Harberger (1950)
and Laursen and Metzler (1950). Using a static framework, they argue that an adverse
terms of trade shock worsens the current account balance due to a negative income e¤ect. A
decrease in the relative price of exportable goods, a worsening of the ToT leads to a decline in
real income and aggregate savings, resulting in a deterioration of the current account balance.
The driving factor behind this result is the permanent income hypothesis. However, these
earlier works have been challenged for their lack of microeconomic foundations. In this paper,
we develop an optimizing model of a small open economy that supports those earlier claims.
Particularly, we focus on developing economies with external debt and sovereign risk.
Using an explicit optimizing model, Obstfeld (1982) was the …rst to revisit this issue.
With endogenous time preferences (a la Uzawa), he showed that a deterioration in a small
country’s terms of trade leads it to save more, consume more in the future and to run a current
account surplus. Obstfeld’s use of Uzawa preferences, which assumes that the subjective
rate of time preference is a positive function of contemporaneous utility is the reason for his
results. This assumption, however, is problematic. In a related study, Svensson and Razin
(1983), using a dynamic optimizing model of the current account, …nd that the e¤ect of
terms of trade shocks on the trade balance depends crucially on the perceived persistence
of the terms of trade. In their model the HLM e¤ect weakens as the terms of trade become
more persistent and may even be overturned if the terms of trade are of a permanent nature.
They also …nd that if the discount rate is increasing in utility then Obstfeld’s result pertains.
This view is known as the Obstfeld-Razin-Svensson (ORS) e¤ect.
While being very critical about Uzawa preferences, Persson and Svensson (1985) use an
overlapping generation (OLG) framework to show how the results depend on the nature
of the shock. For example, the overall results depend very much upon whether the shock
is temporary or permanent, and whether it is anticipated or unanticipated. Moreover, the
2
result is speci…c to the overlapping generations (OLG) framework. Sen and Turnovsky
(1989) employ an in…nite horizon model with a …xed rate of time preference to analyze the
e¤ects of terms of trade shocks. They endogenize employment by having labor-leisure choice.
Furthermore, there is a role for capital accumulation in their model. Using adjustment cost
function for investment, and relying exclusively on the ‘intertemporal solvency condition’,
they show that the short-run dynamics of the economy depend upon the long-run response
of the capital stock. Moreover, as the adverse terms of trade shocks generate a negative
substitution e¤ect and a positive income e¤ect in their model, the resulting behavior depends
upon which e¤ect dominates. Last but not least, Mansoorian (1993) uses an in…nite horizon
framework that uses the habit persistence utility function of the address the HLM e¤ect. In
his model the rate of time preference is …xed. In addition, utility depends on current real
consumption and the habitual standard of living. Mansoorian …nds that the HLM e¤ect
holds but not always. For it not to hold, the marginal utility of real consumption should be
decreasing in the habitual standard of living.
It is important to note that most of the studies assume perfect capital mobility. This is
rather unrealistic for open developing economies. In fact, developing economies face what is
known as an upward sloping supply curve of foreign debt. This is because poor economies
are required to pay an additional risk premium on their external loans (see, Bhandari, et al.
(1990), Fisher (1995) and Chatterjee and Turnovsky (2007) for details). In this paper, while
introducing imperfect capital mobility, we examine the e¤ects of adverse terms of trade in a
small open developing economy.1
Even though this issue has garnered a lot of theoretical interest, there exist some empirical studies on the HLM e¤ect too. Otto (2003) tests the relationship between the terms of
trade and the trade balance for …fty-…ve small open economies. Using a structural vector
autoregressive model, he …nds that a positive terms of trade shock leads to an initial improvement in the trade balance. The …nding is consistent for developing countries and small
OECD countries. In another study, Cashin and Mcdermott (2002) also use a structural VAR
model to show that terms of trade shocks have signi…cant impacts on the current account
balance in Australia and New Zealand. However, in Canada, the United Kingdom, and the
United States, they …nd that terms of trade movements are not important. Furthermore,
using panel data for non-oil commodity exporters in sub-Saharan Africa, Agénor and Aizen1
Similar to our approach a few studies incorporate a borrowing risk premium to adress di¤erent issues.
For example, Kuralbayeva and Vines (2008) examine the e¤ects of terms of trade and risk premium shocks
in a Dutch disease model with international capital mobility. They …nd that an improvement in the terms
of trade is associated with a reduction in the risk premium, which leads to the accumulation of more debt in
the long run. In a related study, Eicher, Schubert and Turnovsky (2008) use an endogenous growth model
to show that debt is procyclical in response to terms of trade shocks.
3
man (2004) …nd that terms of trade increases have a positive e¤ect on private savings. Using
a panel VAR model and data from 75 developing countries, Broda (2004) …nds that terms
of trade shocks di¤er systematically across exchange rate regimes. He observes that they
explain 30% of real GDP ‡uctuations in …xed regimes and about 30% of real exchange rate
‡uctuations in countries with ‡exible regimes. In an earlier panel data study, Spatafora and
Warner (1999) …nd that permanent terms of trade shocks have signi…cant positive e¤ects
on consumption, investment and output, no e¤ect on saving, and an adverse e¤ect on the
trade balance. Last but not least, Mendoza (1995) and Kose (2002) calibrate models to …nd
that terms of trade disturbances account for output volatility in developing countries. While
Mendoza …nds that terms of trade shocks explain 56% of aggregate output ‡uctuations, Kose
…nds that they explain about 88% of aggregate output volatility. As expressed earlier, we
intend to contribute to the theoretical side of this debate.
We develop an in…nite horizon optimizing model with a …xed rate of time preference to
show that adverse terms of trade, in fact, worsen the debt position of small open economies.
In other words, with a growing foreign debt, the current account position of the economy
deteriorates - consistent with Harberger, and Laursen and Metzler …ndings. In our model
households consume both domestic and foreign goods and have labor/leisure choice. The
economy faces an upward sloping supply curve of debt due to the existence of a risk premium.
In our basic model without investment, output is produced with a Ricardian production
function. However, in the complete model, output is produced with a constant returns to
scale production function with both labor and capital as inputs. In addition, investment is
subject to adjustment costs.
The rest of the paper is organized as follows. In section 2, we outline the basic model
without investment and discuss the steady state e¤ects of adverse terms of trade shocks
together with the transitional dynamics. We propose the complete model with investment
in section 3, and also work out the steady state e¤ects. Some concluding remarks are made
in section 4.
2
The Model Without Investment
The model is that of a small open developing economy facing an upward-sloping supply curve
of debt. Unlike the standard assumption of perfect capital mobility where a small economy
can borrow at a …xed world interest rate, r ;we assume that a developing economy is required
to pay an additional risk premium. The country-speci…c risk premium, Z; depends on debtservicing ability. Thus, the e¤ective interest rate for the developing economy, r~; is given
4
as
r~ = r + Z
b
f (l)
; Z 0 > 0;
(1)
where b denotes the stock of foreign debt and f (l) the output level of the economy. With
inelastic capital, labor (l) is the only input in the production process. The possibility of a
cuto¤ in debt is captured by the assumption that the function Z(:) is convex (Z 00 > 0). The
production function f (l) exhibits positive, but diminishing marginal physical productivity.
The representative agent maximizes the present value of lifetime utility as given below:
Z1
u !(cht; ; cft ); lt e
t
(2)
dt;
0
where is the …xed rate of time preference and ! is a utility measure of the services provided
by the agent’s current purchases of home and foreign goods, cht and cft respectively. We
assume that the sub-utility function !(cht ; cft ) is homothetic. For simplicity, we will consider
the utility function to be additively separable, i.e. u (! t ; lt ) = U (!(cht ; cft )) + W (lt ). The
‡ow budget constraint is given as:
b_ t = Et + r~t bt
(3)
f (lt );
where Et = cht + pcft is total consumption expenditure and, p is the world price of the
imported good, which is taken as given by the small open economy. The representative
agent’s problem therefore is to choose a sequence of consumption levels fcht ; cft g to maximize
his lifetime utility (2) subject to (3) and the initial condition, b (0) = b0 .
The maximization can be done in two stages. At the …rst stage, for a given level of
expenditures Et , we choose cht and cft to maximize !(cht ; cft ) subject to Et = cht + pcft . This
gives us the indirect utility function Et V (p), which corresponds to !(cht ; cft ) and satis…es the
condition V 0 (p) < 0: At the second stage, the agent chooses fEt g in order to maximize (2)
subject to (3) and the initial condition b0 . The current-value Hamiltonian for the agent’s
problem may be written as:
H = U (EV (p)) + W (l) + [Et + r~t bt
f (lt )] ;
(4)
where , is the marginal utility of wealth, which for a borrower is the marginal utility of
reducing debt. We obtain the following optimality conditions:
U 0V = ;
5
(5)
W 0 (l) =
f 0 (l) ;
(6)
_ =
r~) ;
(7)
(
and the standard transversality condition. The …rst two optimal conditions have standard
economic interpretations in terms of marginal costs and bene…ts and the last one shows
how the marginal utility of wealth evolves. Now from (5) and (6), we
h solve fori E and l
0
to get Et = E( ; p) and lt = l( );where E = V 21U 00 < 0; Ep = VV E + V 2 U 00 > 0;and
f0
l =
> 0. Now substituting these solutions into Eqs. (3) and (7), we get
V 00 (l) + f 00
_ =
b_ = r + Z
r
b
f (l( ))
Z
b
f (l( ))
b + E ( ; p)
;
(8)
f (l( )) :
(9)
These two equations jointly determine the dynamics of the economy. To check saddlepoint
stability, we linearize equations (8) and (9) around the steady state to obtain:
"
_
b_
#
2
6
=6
4
Z 0 bf 0 l
f2
0 2 0
Zbfl
f2
Z
3
Z0
"
7
f 7
bZ 0 5 b
r~ +
f
0
fl
b
#
:
(10)
Since the determinant of the matrix of coe¢ cients is negative and we have one predetermined
variable, the model has saddlepoint stability. The negative eigenvalue is denoted by : The
adjustment of b and along the optimal path is described by the following:
bt = b + (b0
t
=
+
b)e t ;
Z 0f
Z 0 bf 0 l
f2
b0
(11)
b e t:
(12)
This completes the basic structure and the equilibrium dynamics of the model.
2.1
The E¤ects of Adverse Terms of Trade
Here, we examine the e¤ects of adverse terms of trade (in the form of an increase in p). We
look into the steady state e¤ects of an unanticipated permanent shock. In a model without
ongoing growth in the long run, the steady state is explained by equations (8) and (9) with
_ = b_ = 0: The steady state e¤ects of an increase in p are obtained as follows:
6
db
(Ep bf = l )=f
=
> 0;
dp
D
(13)
d
Ep
=
> 0;
dp
D
(14)
dl
d
=l
> 0;
dp
dp
(15)
dE
d
=E
+ Ep > 0;
dp
dp
(16)
0
where D = E + f l (ff r~b) > 0: These are the steady state e¤ects. Adverse terms of
trade leads to higher foreign debt, higher employment and hence production, and higher
expenditure in the long run. We can clearly show that in the short run both employment
and expenditure will increase ( dE(0)
> 0 and dl(0)
> 0). In fact, expenditure will exhibit
dp
dp
dE(0)
dE
over-shooting in the short run ( dp
> 0).
dp
The intuition for these results are as follows. A terms of trade deterioration represents a
fall in the permanent real wealth of the representative household, who responds by reducing
his consumption of leisure. Falling real wealth increases the marginal utility of wealth as well.
Moreover, the higher price of the importable good increases total consumption expenditures.
The short run increase in employment increases the domestic production level. This is
another reason why total expenditure in the short run ‘over-shoots’its long-run level. The
higher production level also improves the creditworthiness of the economy, thus lowering
the e¤ective interest rate on foreign borrowing. This explains why the net foreign debt
position worsens in the long run. During the transitional period, a higher debt service (for
the growing foreign debt) automatically lowers consumption expenditures. Clearly, there is
no instant impact on foreign debt as b is predetermined. Along the adjustment period b
continues to increase until it reaches its steady state level. The adjustment of these variables
are monotonic.
3
The Model With Capital
In this complete model, we will observe some important changes. First of all, the upwardsloping supply curve of debt is now expressed as
bt
f (kt ; lt )
r~t = r + Z
7
;
(17)
Here, f (kt ; lt ) represents the output level of the economy.
3.1
The Representative Household
For clarity in exposition, we will use a decentralized setup and solve the problems of the
household and …rm separately. With no externality and public goods, the outcome of the
perfectly competitive economy will be identical to that of the central planner (see the second
welfare theorem). The representative household has identical preferences as outlined in the
basic model. However, the ‡ow budget constraint is now given as
b_ t = Et + r~t bt
f (kt ; lt );
(18)
The representative household’s problem, therefore, is to choose a sequence of consumption
levels fcht ; cft g to maximize his lifetime utility (2) subject to (18) and the initial condition,
b (0) = b0 . The maximization can be done in two stages as outlined in the previous setup.
At the …rst stage, for a given level of expenditures Et , choose cht and cft to maximize !(cht ; cft )
subject to Et = cht +pcft . This gives us the indirect utility function Et V (p), which corresponds
to !(cht ; cft ) and satis…es the condition V 0 (p) < 0: At the second stage, the agent chooses
fEt g subject to (18) and initial condition b0 to obtain the following optimality conditions:
U 0V = ;
W 0 (l) =
_ =
(
(19)
fl (k; l) ;
(20)
r~) ;
(21)
and the standard transversality condition: limt !1 e rt t bt = 0: The only di¤erence observed
is with equation (20), the optimal condition involving marginal disutility of work and the
marginal bene…t of labor in terms of output.
3.2
The Representative Firm
The representative …rm produces output with a neoclassical constant returns to scale production function exhibiting positive, but diminishing marginal physical productivity in capital
and labor; i.e. yt = f (kt ; lt ): fk > 0; fl > 0; fkk < 0; fll < 0 and fkk fll fkl2 = 0: Investment
involves adjustment costs given by the function:
G(It ) = It + (It );
(22)
where G(It ) is the total cost associated with the purchase of It units of new capital, and
8
(It ) are the adjustment costs associated with It : The function (It ) is assumed to be a
nonnegative, convex function, with G0 0; G00 > 0: In addition, we may set (0) = 0 and
0
(0) = 0; which means that the cost of zero investment is zero, G(0) = 0; and the marginal
cost of initial investment is unity, G0 (0) = 1: The dividend payment net of investment
expenditure is
Dt = f (kt ; lt )
wt lt
(23)
G(It ):
The …rm’s optimization problem is to maximize the present value of its dividend payments:
Z
0
subject to
1
Dt e
Rt
0
r~v dv
dt =
Z
1
[f (kt ; lt )
wt lt
G(It )]e
0
k_ t = It ;
Rt
0
r~v dv
dt;
(24)
(25)
and the initial condition k(0) = k0 . For simplicity we assume that there is no depreciation of
capital. The current value Hamiltonian for the …rm’s problem is:
H = f (kt ; lt )
wt lt
G(It ) + qt It ;
(26)
where qt , the co-state variable associated with the state variable kt , is the shadow price of
capital. The …rst-order optimality conditions for this problem with respect to lt ; It , and kt
are, respectively:
fl (kt ; lt ) = wt ;
(27)
G0 (It ) = qt ;
(28)
q_t = qt r~t
fk (kt ; lt );
(29)
and the transversality condition: lim e rt qt kt = 0: As an optimal condition we get real wage
t!1
equal to the marginal product of labor. In equilibrium there is no investment and hence we
get the shadow price of capital to be unity. This is consistent with "Tobin’s q" theory of
investment. This implies that in equilibrium the e¤ective interest rate equals the marginal
productivity of capital. Equation (29) explains how the shadow price of capital evolves o¤
9
equilibrium.
3.3
Equilibrium Dynamics
By combining all the optimality conditions derived from the household’s and …rm’s problems,
together with the ‡ow budget constraint, the economy can be described by the following set
of equations:
U 0 (EV (p)):V = ;
(30)
W 0 (l) =
_ =
(31)
fl (k; l)
r
b
f (k; l)
Z
(32)
;
q = 1 + G0 (I);
(33)
k_ = I;
(34)
q_ = q~
r
(35)
fk (k; l);
b_ = E + G(I) + r + Z
b
f (k; l)
b
f (k; l):
(36)
Now from (35), (36) and (38) the equilibrium levels of Z, l and I can be obtained as follows:
E = E( ; p:k);
(37)
l = l( ; p; k);
(38)
I = I(q);
(39)
i
1
V0 h
fl
where E = 2 00 < 0; Ep =
Z + 2 00 > 0; Ek = 0; l =
; lp = 0;
V U
V
V U
W 00 + fll
flk
1
lk =
>
0;
and
I
=
> 0:
q
00
W 00 + fll
Incorporating the equations above, the dynamic behavior of the economy is determined
by the following system of di¤erential equations:
10
_ =
r
q_ = q r + Z
Z
b
f (k; l( ; k))
b
f (k; l( ; k))
(40)
;
(41)
fk (k; l( ; k));
k_ = I(q);
(42)
b
f (k; l( ; k))
b_ = E( ; p) + G(I(q) + r + Z
b
(43)
f (k; l( ; k)):
To understand the dynamics, we linearize the above system of equations around the steady
state to obtain:
2
6
6
6
6
4
where a11 =
_
q_
k_
b_
3
7 6
7 6
7=6
7 6
5 4
a11 0 a13 a14
a21 a22 a23 a24
0 a32 0
0
a41 1 a43 a44
32
76
76 q
76
76 k
54
b
Z 0b
Z 0b
f
l
;
a
=
(fk + fl lk ) ; a14 =
l
13
f2
f2
a22 = r~; a23 = fkk + fkl lk ; a24 =
a43 =
2
qZ 0
; a32 = I 0 (q); a41 =
f
q
k
b
Z0
; a21 =
f
E
3
7
7
7
7
5
(44)
qZ 0 b
fl l + fkl l
f2
b2 Z 0
fl lk
f2
fl l
;
;
bZ 0
b2 Z 0
+
1
(f
+
f
l
)
;
and
a
=
r
~
+
:
k
l
k
44
f2
f
All the elements of the coe¢ cient matrix in (44) are evaluated at their steady state values.
Once again, the system has two predetermined variables (b and k) and two jump variables
( and q). For saddlepoint stability, the coe¢ cient matrix must have two negative and
two positive eigenvalues. Because of the complexity of the model, it is not possible to
show saddlepoint stability analytically.2 However, we could show that the conditions for
saddlepoint stability will be satis…ed with reasonable functional forms and parameter values.
2
This is one of the main reasons why we …rst developed a simpler version of the model, where we could
show saddlepoint stability analytically.
11
3.4
The E¤ects of Terms of Trade Shock
In this subsection we analyze the long run e¤ects of a terms of trade shock in the complete
model. First, we obtain the set of equations that describe the steady state:
U 0 EV (p) V = ;
(45)
W0 l =
fl (k; l);
(46)
=r +Z
b
f (k; l)
(47)
;
(48)
q = 1;
fk (k; l) = r + Z
f (k; l) = E + r + Z
b
f (k; l)
b
f (k; l)
(49)
;
b
These equations jointly determine the steady state equilibrium values of Z, l, k; b,
The steady state e¤ects of an increase in p are as follows:
dE
=
dp
and q.
dq
= 0;
dp
(51)
dk
f fkl fl V 0 (V U 00 E + U 0 )
=
> 0;
dp
D
(52)
dl
=
dp
db
=
dp
(50)
fkk f fl V 0 (V U 00 E + U 0 )
> 0;
D
fk fkl )fl V 0 (V U 00 E + U 0 )
> 0;
D
(54)
rb) + fk fkl (rb f )fl V 0 (V U 00 E + U 0 )
>0
D
(55)
b(fl fkk
fl fkk (f
(53)
where D = fl2 V 2 U 00 fkk (f r~b) + fl V 2 U 00 fkl fk (rb f ) + f fkk W 00 > 0
It is clear that an increase in the relative price or a terms of trade deterioration leads to
12
a higher level of domestic activity in terms of investment and employment. The intuition for
these results is as follows. A terms of trade deterioration represents a fall in the permanent
real income of the representative household, who then responds by reducing his consumption
of leisure. Moreover, the higher price of the importable good increases total consumption
expenditures. Thus, the short run increase in employment increases the domestic production
level. This also increases the marginal productivity of capital. Though investment does not
respond immediately, we observe a gradual increase in investment. The higher production
level also improves the creditworthiness of the economy. This lowers the e¤ective interest rate
on foreign borrowing. It is important to note that in the shortrun we observe no change in the
level of investment or the accumulation of foreign debt. However, output level increases in
the shortrun. This helps lowering the e¤ective interst rate due to improved creditworthiness.
This explains why the net foreign debt position worsens in the long run. It is also important
to note that in the steady state debt-income ration remains unchanges. In other words,
income and foreign debt change proportionately. Interestingly, the variables like investment,
debt will exhibit non-monotonic transition –signi…cantly di¤erent from the basic model.
4
Concluding Remarks
We develop an intertemporal optimizing model of a small open developing economy facing
an imperfect capital market to examine the e¤ects of adverse terms of trade shocks. We show
that adverse terms of trade lead to a higher external debt (a worsening current account).
This is consistent with Harberger, and Laursen and Metzler. In our model, higher income
allows the economy to consume more. Higher income also works as collateral for the developing economy for additional foreign debt due to improved creditworthiness. It is important
to note that we assumed a …xed rate of time preference. In a standard in…nite horizon optimizing model of a small open economy with perfect capital mobility, where the economy
faces a …xed interest rate (as determined by the rest of the world), the …xed rate of time
preferences does not work due to degenerate dynamics. For saddlepoint stability, one needs
to assume an equality between a …xed interest rate and the …xed rate of time preference.
This, also, restricts the model signi…cantly in terms of transitional dynamics. To overcome
this problem, researchers often used the controversial Uzawa preferences. Some others use
adjustment costs of investment to restrict the volatile behavior of investment that arises in
such an environment. In our model this problem got resolved because of imperfect capital
mobility implied by the upward slopping supply curve of foreign debt. In other words, the
e¤ective interest rate in this small developing economy is endogenous. Another important
aspect warrants further attention. In our complete model, the optimal paths of some of our
13
important variables such as capital stock and current account balance (or debt position)
are non-monotonic during the transitional periods. Though it is somewhat di¢ cult to show
them analytically, a numerical evaluation (calibration) could show them with relative ease.
The non-monotonic adjustment of the current account is very signi…cant in the literature
dealing with "J" curve and such. Our model could potentially explain those stylized facts.
We leave this for future research.
References
[1] Agénor, P-R., and Aizenman, J. Savings and the terms of trade under borrowing constraints. Journal of International Economics 63, 321-340.
[2] Bhandari, J.S., Haque, N.U., and Turnovsky, S.J., 1990. Growth, external debt and
sovereign risk in a small open economy. IMF Sta¤ Papers 37, 388-417.
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