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External Debt Evolution When Global Financial Markets Are Incomplete

In: A Financial Crisis Manual

Author

Listed:
  • Alexis Anagnostopoulos
  • Gregorios D. Siourounis

Abstract

This chapter studies the evidence that international financial markets’ incompleteness is an important feature that can explain the evolution of a country’s external debt and output growth in the presence of productivity shocks. Recent financial turmoil in the heart of Europe, the Eurozone, shows a great need to understand how financial linkages between countries behave in the presence of adverse shocks as well as the extent of policy intervention needed. In order to address that, we use a two-country general equilibrium model that allows interaction between the financial markets of the two countries. We then characterize the response process of net foreign assets accumulation or external debt1 and output growth under both complete and incomplete markets and use this analysis as a road map to test empirically the behavior of these variables in a panel of 60 countries. We show that the behavior of external debt and output growth can be rationalized by the incomplete markets model.

Suggested Citation

  • Alexis Anagnostopoulos & Gregorios D. Siourounis, 2015. "External Debt Evolution When Global Financial Markets Are Incomplete," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Dimitrios D. Thomakos & Platon Monokroussos & Konstantinos I. Nikolopoulos (ed.), A Financial Crisis Manual, chapter 10, pages 201-224, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-1-137-44830-9_11
    DOI: 10.1057/9781137448309_11
    as

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