NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Real Interest Rates, Home Goods, and Optimal External Borrowing

Rudiger Dornbusch

NBER Working Paper No. 779 (Also Reprint No. r0366)
Issued in May 1983
NBER Program(s):   ITI   IFM

The paper investigates the optimal tire path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rates. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home gods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in interest rates.

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Published: Dornbusch, Rudiger. "Real Interest Rates, Home Goods, and Optimal External Borrowing." Journal of Political Economy, Vol. 91, No. 1 (1983), pp. 141-15 3.

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