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LDC Debt in the 1980s: Risk and Reforms

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  • Jeffrey Sachs
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    Abstract

    With the rapid increase in LDC indebtedness in the recent decade, the issues of creditworthiness and country risk have gained new importance. This paper offers a theoretical and historical analysis of international capital markets in the presence of default risk. The theoretical model suggests the possibility of a prisoners' dilemma in the loan market, in which a country's dominant noncooperative strategy is to default, though a welfare-improving cooperative strategy is available. The historical analysis suggests that the IMF may play a key role in guiding creditors and debtor nations to reach cooperative solutions.

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    File URL: http://www.nber.org/papers/w0861.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0861.

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    Date of creation: Feb 1982
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    Publication status: published as LDC Debt: Problems and Prospects", P. Watchel Ed., Crisis in Economic and Financial Structure, (Lexington Books, 1982)
    Handle: RePEc:nbr:nberwo:0861

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    1. Ulrich Baumgartner & G. G. Johnson & K. Burke Dillon & R. C. Williams & Peter Keller & Maria Tyler & Bahram Nowzad & G. Russell Kincaid & Tomás Reichmann, 1981. "External Indebtedness of Developing Countries," IMF Occasional Papers 3, International Monetary Fund.
    2. 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.
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    Cited by:
    1. Rudiger Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc.

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