Optimal saving and sustainable foreign debt

Abstract

This paper develops and discusses an open-economy growth model in a modi!ed Arrow learning-by-doing framework, in which workers learn through experience on the job, thereby increasing their productivity. Applying optimal control to maximize the discounted stream of intertemporal consumption, the model yields domestic saving rates of 18-22 percent of GDP, which are feasible targets in developing and emerging market economies. Sustainable gross foreign debt is in the range of 39-50 percent of GDP. Saving, debt, and growth policies are suggested.

JEL classification: E130, O410