Endogenous debt crises
AbstractWe distinguish two types of debt crises: those that are the outcome of exogenous shocks (to productivity growth for instance) and those that are endogenously created, either by self-fulfilling panic in financial markets or by the reckless behavior of "Panglossian" borrowers. After Krugman, we characterize as "Panglossian" those borrowers who only focus on their best growth prospects, anticipating to default on their debt if hit by an adverse shock, rationally ignoring the risk of default. We apply these categories empirically to the data. We show that, taken together, endogenous crises are powerful explanations of debt crises, more important for instance than the sheer effect of growth on a country's solvency.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8270.
Date of creation: Feb 2011
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Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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