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Public Debt Guarantees and Private Capital Flight

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Author Info
Jonathan Eaton

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Abstract

Significant amounts of private capital have flowed out of several of the more heavily indebted developing countries. This outflow, often called "capital flight ," largely escapes taxation by the borrowing-country government, and has generated concern about the prospects for future servicing of the debt. Imperfect contract enforcement may lead to implicit or explicit government guarantee of foreign debt. The model developed below demonstrates that a government policy of guaranteeing private debt can, in turn, generate more than one outcome. One such outcome replicates the allocation under perfect contract enforcement: national savings is invested domestically and foreign debt is repaid. The tax obligation implied by potential nationalization of private debt, however, can also lead to another outcome in which national capital flees and foreign debt may not be repaid.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2172.

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Date of creation: Oct 1987
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Handle: RePEc:nbr:nberwo:2172

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  1. Meenakshi Rishi & Valerie Cerra & Sweta Chaman Saxena, 2005. "Robbing the Riches: Capital Flight, Institutions, and Instability," IMF Working Papers 05/199, International Monetary Fund. [Downloadable!]
  2. Michael P. Dooley & Kenneth M. Kletzer, 1994. "Capital Flight, External Debt and Domestic Policies," NBER Working Papers 4793, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Dennis P J Botman & Cees G H Diks, 2002. "Location of Investors and Capital Flight," Tinbergen Institute Discussion Papers 02-013/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  4. Velasco, A., 1992. "Animal Spirits, Capital Repatriation and Investment," Working Papers 92-43, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  5. Chowdhury, Abdur R., 2001. "External Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  6. Collier, Paul & Hoeffler, Anke & Pattillo, Catherine, 1999. "Flight capital as a portfolio choice," Policy Research Working Paper Series 2066, The World Bank. [Downloadable!]
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  7. Dennis P. J. Botman & Cees G. H. Diks, 2005. "The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks," IMF Working Papers 05/205, International Monetary Fund. [Downloadable!]
  8. A. R. Kemal, 2001. "Debt Accumulation and Its Implications for Growth and Poverty," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 263-281. [Downloadable!]
  9. Hermes, Niels & Lensink, Robert & Murinde, Victor, 2002. "Flight Capital and its Reversal for Development Financing," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  10. John T. Cuddington & Hong Liang & Shihua Lu, 1996. "Uncertainty, Trade, and Capital Flows in Sub-Saharan Africa," International Finance 9602002, EconWPA. [Downloadable!]
  11. Elhanan Helpman, 1990. "Voluntary Debt Reduction: Incentives and Welfare," NBER Working Papers 2692, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Velasco, A., 1992. "A Model of Cyclical International Capital Movements," Working Papers 92-44, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  14. Velasco, Andres, 1991. "Fiscal Increasing Returns, Investment and International Capital Movements," Working Papers 91-36, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  15. Buiter, Willem H & Sibert, Anne, 1999. "UDROP: A Small Contribution to the New International Financial Architecture," CEPR Discussion Papers 2138, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  16. Diwan, Ishac & Verdier, Thierry, 1991. "Distributional aspects of debt adjustment," Policy Research Working Paper Series 657, The World Bank. [Downloadable!]
  17. Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," UCLA Economics Working Papers 538, UCLA Department of Economics. [Downloadable!]
    Other versions:
  18. Claessens, Stijn, 1991. "Alternative forms of external finance : a survey," Policy Research Working Paper Series 812, The World Bank. [Downloadable!]
    Other versions:
  19. SWARAY, Raymond B., 2005. "Primary Commodity Dependence And Debt Problem In Less Developed Countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(4). [Downloadable!]
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