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On Overborrowing

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  • Martín Uribe

Abstract

This paper characterizes the equilibrium dynamics in an economy facing an aggregate debt ceiling. This borrowing limit is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators. Individual agents do not internalize the borrowing constraint. Instead, a country interest-rate premium emerges to clear the financial market. The implied equilibrium dynamics are compared to those arising from a model in which the debt ceiling is imposed at the level of each individual agent. 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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Suggested Citation

  • Martín Uribe, 2006. "On Overborrowing," American Economic Review, American Economic Association, vol. 96(2), pages 417-421, May.
    • Handle: RePEc:aea:aecrev:v:96:y:2006:i:2:p:417-421
    Note: DOI: 10.1257/000282806777211829
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Eduardo Fernández-Arias & Davide Lombardo, 1998. "Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy," IDB Publications (Working Papers) 6808, Inter-American Development Bank.
    3. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    4. Fernández-Arias, Eduardo & Lombardo, Davide, 2011. "Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy," IDB Publications (Working Papers) 6095, Inter-American Development Bank.
    5. repec:idb:wpaper:369 is not listed on IDEAS
    6. Finn E. Kydland & Carlos E. Zarazaga, 1997. "Is the business cycle of Argentina "different?"," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 21-36.
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    Cited by:

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    4. Kim, Yun Jung & Zhang, Jing, 2012. "Decentralized borrowing and centralized default," Journal of International Economics, Elsevier, vol. 88(1), pages 121-133.
    5. Zhao, Yan, 2013. "Borrowing constraints and the trade balance–output comovement," Economic Modelling, Elsevier, vol. 32(C), pages 34-41.

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    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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