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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. 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.
  2. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  3. Peter H. Lindert & Peter J. Morton, 1989. "How Sovereign Debt Has Worked," NBER Chapters, in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 39-106 National Bureau of Economic Research, Inc.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2003. "Sudden Stops, the Real Exchange Rate, and Fiscal Sustainability: Argentina's Lessons," NBER Working Papers 9828, National Bureau of Economic Research, Inc.
  5. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  6. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  7. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  8. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications 4203, Inter-American Development Bank, Research Department.
  9. Dani Rodrik, 1995. "Why is there Multilateral Lending?," NBER Working Papers 5160, National Bureau of Economic Research, Inc.
  10. Manuel Amador, 2004. "A Political Model Sovereign Debt Repayment," 2004 Meeting Papers 762, Society for Economic Dynamics.
  11. Giovanni Dell'Ariccia & Jeromin Zettelmeyer & Isabel Schnabel, 2002. "Moral Hazard and International Crisis Lending: A Test," IMF Working Papers 02/181, International Monetary Fund.
  12. 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.
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Citations

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Cited by:
  1. 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.
  2. Yeyati, Eduardo Levy & Panizza, Ugo, 2011. "The elusive costs of sovereign defaults," Journal of Development Economics, Elsevier, vol. 94(1), pages 95-105, January.
  3. Eduardo Levy Yeyati & Ugo Panizza, 2006. "The Cost of Reserves," Business School Working Papers 2006-11, Universidad Torcuato Di Tella.
  4. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," CAMA Working Papers 2013-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," NBER Working Papers 18855, National Bureau of Economic Research, Inc.
  6. Eduardo Fernandez-Arias, 2010. "Multilateral Safety Nets for Financial Crises," Research Department Publications 4668, Inter-American Development Bank, Research Department.

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