Growth and External Debt Under Risk of Debt Repudiation
AbstractWe analyze the pattern of growth of a nation which borrows abroad and which has the option of repudiating its foreign debt. We show that the equilibrium strategy of competitive lenders is to make the growth of the foreign debt contingent on the growth of the borrowing country. We give a closed-form solution to a linear version of our model. The economy, in that case, follows a two-stage pattern of growth. During the first stage, the debt grows more rapidly than the economy. During the second stage, both the debt and the economy grow at the same rate, and more slowly than in the first stage. During this second stage, the total interest falling due on the debt is never entirely repaid; only an amount proportional to the difference of the rate of interest and the rate of growth of the economy is repaid each period.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1703.
Date of creation: Sep 1985
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Publication status: published as Daniel Cohen, Jeffrey Sachs. "Growth and External Debt Under Risk of Debt Repudiation," in Georges de Ménil and Robert J. Gordon, editors, "International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics" Elsevier Science Publishers B.V., 1991 (1991)
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Other versions of this item:
- Cohen, Daniel & Sachs, Jeffrey, 1986. "Growth and external debt under risk of debt repudiation," European Economic Review, Elsevier, vol. 30(3), pages 529-560, June.
- Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472 National Bureau of Economic Research, Inc.
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- Foley, Duncan K. & Hellwig, Martin F., 1975. "A note on the budget constraint in a model of borrowing," Journal of Economic Theory, Elsevier, vol. 11(2), pages 305-314, October.
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- Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
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