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Foreign debt supply in an imperfect international capital market: Theory and evidence

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  • Chung, Keunsuk
  • Turnovsky, Stephen J.

Abstract

We investigate the determinants of foreign borrowing costs in a stochastically growing economy. We find that these increase with the debt-wealth ratio, depending also upon the volatilities of domestic and foreign origin, and the length of debt contract. In addition, the sensitivity of the short-term debt supply to the debt-wealth ratio exceeds that of long-term debt, and the effects of volatility on the borrowing premium, growth of wealth, and its volatility, depend on the relative size of a direct effect and a secondary portfolio-adjustment effect of the initial shock, as well as the length of the debt contract. Panel regressions suggest that the empirical evidence generally support the theoretical predictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 2 (March)
Pages: 201-223

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:2:p:201-223

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Arbitrage Capital market imperfection Default risk Foreign debt Volatility;

References

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Cited by:
  1. Fakhraddin Maroofi & Parviz Kafchehi, 2012. "The Influence of Oil Prices on an Oil-Importing Developing Economy," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(4), pages 66-82, October.
  2. Heer, Burkhard & Schubert, Stefan Franz, 2012. "Unemployment and debt dynamics in a highly indebted small open economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1392-1413.
  3. Schubert, Stefan F. & Turnovsky, Stephen J., 2011. "The impact of oil prices on an oil-importing developing economy," Journal of Development Economics, Elsevier, vol. 94(1), pages 18-29, January.

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