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Developing country borrowing and domestic wealth

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Author Info

  • Mark Gertler
  • Kenneth Rogoff

Abstract

We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (1989)
Issue (Month): ()
Pages:

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Handle: RePEc:fip:fedfpr:y:1989:x:4

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Keywords: Capital market;

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References

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  1. repec:att:wimass:8820 is not listed on IDEAS
  2. Raquel Fernandez & Robert W. Rosenthal, 1988. "Sovereign-debt Renegotiations: A Strategic Analysis," NBER Working Papers 2597, National Bureau of Economic Research, Inc.
  3. Jeremy Greenwood & Stephen D. Williamson, 1988. "International financial intermediation and aggregate fluctuations under alternative exchange rate regimes," Staff Report 112, Federal Reserve Bank of Minneapolis.
  4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  5. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  6. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  7. Jeffrey A. Frankel and Alan T. MacArthur., 1987. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," Economics Working Papers 8762, University of California at Berkeley.
  8. Maurice Obstfeld, 1985. "Capital Mobility in the World Economy: Theory and Measurement," NBER Working Papers 1692, National Bureau of Economic Research, Inc.
  9. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  10. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  11. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  12. Stulz, ReneM., 1986. "Capital mobility in the world economy: Theory and measurement A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 105-113, January.
  13. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  14. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, vol. 23(3-4), pages 201-220, November.
  15. Mark Gertler, 1988. "Financial Capacity, Reliquification, and Production in an Economy with Long-Term Financial Arrangements," NBER Working Papers 2763, National Bureau of Economic Research, Inc.
  16. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
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Cited by:
  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich to Poor Capital Flows," NBER Working Papers 10296, National Bureau of Economic Research, Inc.
  2. Reichlin, Pietro, 2006. "Relating Output and Volatility in a Model of International Risk-Sharing with Limited Commitment," CEPR Discussion Papers 5557, C.E.P.R. Discussion Papers.
  3. Sule Ozler & Guido Tabellini, 1991. "External Debt and Political Instability," NBER Working Papers 3772, National Bureau of Economic Research, Inc.
  4. Reinhart, Carmen & Rogoff, Kenneth, 2005. "Serial Default and Its Remedies," MPRA Paper 7423, University Library of Munich, Germany.

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