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Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries

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  • Eduardo Levy Yeyati

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Abstract

According to reputation models of sovereign debt, the incentives to repay are proportional to the income insurance benefits provided by access to international markets. This paper, however, documents that private net lending to developing countries exhibits a procyclical or acyclical pattern, contradicting this premise. By contrast, official debt net flows exhibit a countercyclical patter. In addition, the paper shows that (both current and past) defaults are associated with lower net debt flows. The findings, which are robust to various additional controls, cast doubt on the reputation view of sovereign debt markets. At the same time, they suggest that reputation may account for the success of the (implicit) preferred creditor status enjoyed by multilateral lenders.

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File URL: http://hdl.handle.net/10.1007/s11079-008-9086-4
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 20 (2009)
Issue (Month): 4 (September)
Pages: 489-507

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Handle: RePEc:kap:openec:v:20:y:2009:i:4:p:489-507

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Sovereign debt; Capital flows; Debt default; E6; F3; F4; G1;

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References

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  1. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications 4203, Inter-American Development Bank, Research Department.
  2. Morris, Stephen & Shin, Hyun Song, 2006. "Catalytic finance: When does it work?," Journal of International Economics, Elsevier, vol. 70(1), pages 161-177, September.
  3. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  4. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
  5. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
  6. Ozler, Sule, 1993. "Have Commercial Banks Ignored History?," American Economic Review, American Economic Association, vol. 83(3), pages 608-20, June.
  7. Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April.
  8. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  9. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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Citations

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Cited by:
  1. Michael Tomz & Mark L. J. Wright, 2012. "Empirical research on sovereign debt and default," Working Paper Series WP-2012-06, Federal Reserve Bank of Chicago.
  2. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  3. Ugo Panizza & Eduardo Levy Yeyati, 2006. "The Elusive Costs of Sovereign Defaults," IDB Publications 6713, Inter-American Development Bank.
  4. Eduardo Fernandez-Arias, 2010. "Multilateral Safety Nets for Financial Crises," Research Department Publications 4668, Inter-American Development Bank, Research Department.
  5. Eduardo Levy Yeyati & Ugo Panizza, 2006. "The Cost of Reserves," Business School Working Papers 2006-11, Universidad Torcuato Di Tella.

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