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Investment in Developing Countries
The enhanced access of developing countries to the international financial market since the seventies has been characterized by boom-bust cycles of unfettered external borrowing followed by abrupt financial crises. The first chapter analyzes the macroeconomic effects of volatile capital flows to a developing country. The analysis shows that investment, consumption, and the current account deficit depend positively on the expected availability of external finance. If international investors may unexpectedly decide to reduce their exposure to financial assets issued by the country, the optimal cost of external borrowing should exceed the interest rate paid by domestic residents in the internat...
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