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Developing Country Borrowing and Domestic Wealth

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  • Mark Gertler
  • Kenneth Rogoff

Abstract

We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2887.

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Date of creation: Mar 1989
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Publication status: published as "Developing Country Borrowing and Domestic Wealth," Proceedings, Federal Bank of San Francisco, 1989.
Handle: RePEc:nbr:nberwo:2887

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  1. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  2. Fernandez, R. & Rosenthal, R.W., 1988. "Sovereign-Debt Renegotiations: A Strtegic Analysis," Papers, Boston University - Center for Latin American Development Studies 85, Boston University - Center for Latin American Development Studies.
  3. Jeremy Greenwood & Stephen D. Williamson, 1988. "International financial intermediation and aggregate fluctuations under alternative exchange rate regimes," Staff Report, Federal Reserve Bank of Minneapolis 112, Federal Reserve Bank of Minneapolis.
  4. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 559-596.
  5. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  6. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(1), pages 155-78, February.
  7. Frankel, Jeffrey A. & MacArthur, Alan T., 1988. "Political vs. currency premia in international real interest differentials : A study of forward rates for 24 countries," European Economic Review, Elsevier, Elsevier, vol. 32(5), pages 1083-1114, June.
  8. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 314-29, June.
  9. Dixit, Avinash, 1987. "Trade and insurance with moral hazard," Journal of International Economics, Elsevier, Elsevier, vol. 23(3-4), pages 201-220, November.
  10. Obstfeld, Maurice, 1986. "Capital mobility in the world economy: Theory and measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 24(1), pages 55-103, January.
  11. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  12. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  13. Gertler, M., 1988. "Financial Capacity, Reliquification, And Production In An Economy With Long-Tem Financial Arrangements," Working papers, Wisconsin Madison - Social Systems 8820, Wisconsin Madison - Social Systems.
  14. Stulz, ReneM., 1986. "Capital mobility in the world economy: Theory and measurement A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 24(1), pages 105-113, January.
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Cited by:
  1. Niloy Bose & Jill A. Holman & Kyriakos C. Neanidis, 2007. "The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 433-452, 07.
  2. Ozler, Sule & Tabellini, Guido, 1991. "External Debt and Political Instability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 582, C.E.P.R. Discussion Papers.
  3. Reinhart, Carmen & Rogoff, Kenneth, 2004. "Serial default and the “paradox” of rich to poor capital flows," MPRA Paper 13997, University Library of Munich, Germany.
  4. Reinhart, Carmen & Rogoff, Kenneth, 2005. "Serial Default and Its Remedies," MPRA Paper 7423, University Library of Munich, Germany.
  5. Reichlin, Pietro, 2006. "Relating Output and Volatility in a Model of International Risk-Sharing with Limited Commitment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5557, C.E.P.R. Discussion Papers.

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