External debt, planning horizon, and distorted credit markets
The purpose of this paper is to study the role of policies in the presence of country risk with overdiscounting by the policy maker. Overdiscounting may reflect political uncertainty, which makes the effective planning horizon of the centralized government shorter than that of the private sector. The consequence of overdiscounting is to shift the supply curve facing the economy leftwards. The role of optimal borrowing policies in the presence of country risk is to discourage borrowing for consumption purposes, encourage investment in openness, and discourage investment in activities that reduce openness. The effect of overdiscounting by the policy maker is to increase the values of the optimal policy instruments (i.e. to increase the magnitude of the borrowing taxes and subsidies). Increasing the relative importance of open activities can be viewed as a way to reduce the harmful consequences of overdiscounting. Overdiscounting may rationalize various conditionality clauses that will induce the economy to follow the desired credit market policies.
(This abstract was borrowed from another version of this item.)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rudiger Dornbusch, 1984.
"External Debt, Budget Deficits and Disequilibrium Exchange Rates,"
NBER Working Papers
1336, National Bureau of Economic Research, Inc.
- R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
- Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-61, March.
- Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
- Alesina, Alberto F & Tabellini, Guido, 1988.
"External Debt, Capital Flight and Political Risk,"
CEPR Discussion Papers
253, C.E.P.R. Discussion Papers.
- Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," NBER Working Papers 2610, National Bureau of Economic Research, Inc.
- Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," UCLA Economics Working Papers 538, UCLA Department of Economics.
- Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
- Sebastian Edwards, 1985.
"Country Risk, Foreign Borrowing and the Social Discount Rate in an Open Developing Economy,"
NBER Working Papers
1651, National Bureau of Economic Research, Inc.
- Edwards, Sebastian, 1986. "Country risk, foreign borrowing, and the social discount rate in an open developing economy," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages 79-96, March.
- Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
- Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:9:y:1990:i:2:p:138-158. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.