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Foreign debt supply in an imperfect international capital market: Theory and evidence

  • Chung, Keunsuk
  • Turnovsky, Stephen J.

We investigate the determinants of foreign borrowing costs in a stochastically growing economy. We find that these increase with the debt-wealth ratio, depending also upon the volatilities of domestic and foreign origin, and the length of debt contract. In addition, the sensitivity of the short-term debt supply to the debt-wealth ratio exceeds that of long-term debt, and the effects of volatility on the borrowing premium, growth of wealth, and its volatility, depend on the relative size of a direct effect and a secondary portfolio-adjustment effect of the initial shock, as well as the length of the debt contract. Panel regressions suggest that the empirical evidence generally support the theoretical predictions.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 2 (March)
Pages: 201-223

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:2:p:201-223
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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