Threshold effects in international lending
The author's dynamic model of international borrowing subject to credit constraint was developed for an economy with increasing returns to physical capital. Increases in the capital stock within the nonconvex range increase debtor borrowing opportunities. Conversely, a temporary liquidity shock may permanently lower the economy's growth path. Introducing aggregate nonconvexities also has different implications for policy on debt overhangs. In particular, the model allows for rational relending by creditors. It also predicts that new money ( or interest capitalization ) is in the interest of creditors and will be part of a debt restructuring strategy - as it was recently for Mexico and the Philippines.
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12491028, Harvard University Department of Economics.
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National Bureau of Economic Research, Inc.
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89-24, C.V. Starr Center for Applied Economics, New York University.
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- Majumdar, Mukul & Mitra, Tapan, 1982. "Intertemporal allocation with a non-convex technology: The aggregative framework," Journal of Economic Theory, Elsevier, vol. 27(1), pages 101-136, June.
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