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Donor Herding and Domestic Debt Crisis

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Author Info

  • Ephraim W. Chirwa
  • Montfort Mlachila
  • Yohane Anthony Khamfula

Abstract

This paper presents a new model based on the loan-pushing model by Basu (1991) to show how a domestic debt crisis can occur in a low-income country following donor herding. The model focuses on the rational herding behavior of donors due to payoff and information externalities. Although there are many theoretical models on herding behavior, these models have not formally considered the relationship between donor herding and domestic debt crisis in a low-income country. This paper is an attempt to fill this gap. The paper shows that due to donor herding behavior a domestic debt crisis can occur once the actual debt level is above the desirable one.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/109.

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Length: 10
Date of creation: 01 Apr 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/109

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Related research

Keywords: Government expenditures; Economic models; debt crisis; domestic debt; domestic financial market; domestic debt data; debt data; foreign loans; foreign aid; public finance; domestic debt stocks; domestic creditors; debt maturity; debt stocks;

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References

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  1. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, Econometric Society, vol. 62(5), pages 1065-85, September.
  2. Vives, Xavier, 1993. "How Fast Do Rational Agents Learn?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(2), pages 329-47, April.
  3. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  4. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 603-615, April.
  5. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
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Cited by:
  1. Yohane Khamfula, 2006. "Fiscal uncertainty with donor herding and domestic debt crisis," Working Papers 07/2006, Stellenbosch University, Department of Economics.
  2. Isabel Ortiz & Jingqing Chai & Matthew Cummins, 2011. "Identifying Fiscal Space:Options for Social and Economic Development for Children and Poor Households in 184 Countries," Working papers, UNICEF,Division of Policy and Strategy 1108, UNICEF,Division of Policy and Strategy.

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