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Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrome

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  • Martín Uribe

Abstract

This paper compares the equilibrium dynamics of an economy facing an aggregate collateral constraint on external debt to the dynamics of an economy facing a collateral constraint imposed at the level of each individual agent. The aggregate collateral constraint is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators as opposed to individual abilities to pay. Individual agents do not internalize the aggregate borrowing constraint. Instead, in this economy a country interest-rate premium emerges to clear the financial market. The central finding of the paper is that the economy with the aggregate borrowing limit does not generate higher levels of debt than the economy with the individual borrowing limit. That is, there is no overborrowing in equilibrium.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12260.

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Date of creation: May 2006
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Handle: RePEc:nbr:nberwo:12260

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  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  2. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
  3. Eduardo Fernández-Arias & Davide Lombardo, 1998. "Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy," IDB Publications 6808, Inter-American Development Bank.
  4. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejia, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," NBER Working Papers 10520, National Bureau of Economic Research, Inc.
  5. Finn E. Kydland & Calos E.J.M.Zarazaga, 1997. "Is the business cycle of Argentina "different?"," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, issue Q IV, pages 21-36.
  6. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 163-185, October.
  7. Roberto Garcia-Saltos & Leonardo Auernheimer, 2000. "International Debt and the Price of Domestic Assets," IMF Working Papers 00/177, International Monetary Fund.
  8. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(6), pages 1319-29, December.
  9. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 797-818, September.
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Cited by:
  1. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2013. "Financial crises and macro-prudential policies," Journal of International Economics, Elsevier, Elsevier, vol. 89(2), pages 453-470.
  2. Gondo, Rocío, 2013. "Default Externalities in Emerging Market Systemic Private Debt Crises," Working Papers, Banco Central de Reserva del Perú 2013-023, Banco Central de Reserva del Perú.
  3. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, American Economic Association, vol. 100(4), pages 1523-55, September.
  4. Stephanie Schmitt-Grohe & Martin Uribe, 2012. "Prudential Policy for Peggers," NBER Working Papers 18031, National Bureau of Economic Research, Inc.
  5. Andrés Fernández & Alessandro Rebucci & Martín Uribe, 2013. "Are Capital Controls Prudential? An Empirical Investigation," NBER Working Papers 19671, National Bureau of Economic Research, Inc.
  6. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 194-209, July.
  7. Gondo, Rocío, 2014. "State Contingent Assets, Financial Crises and Pecuniary Externalities in Models with Collateral Constraints," Working Papers, Banco Central de Reserva del Perú 2014-001, Banco Central de Reserva del Perú.
  8. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "Prudential Policy for Peggers," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8961, C.E.P.R. Discussion Papers.
  9. Juan Carlos Hatchondo & Cesar Sosa-Padilla & Leonardo Martinez, 2010. "Debt dilution, overborrowing, and sovereign default risk," 2010 Meeting Papers, Society for Economic Dynamics 481, Society for Economic Dynamics.

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