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Uncertainty and the disappearance of international credit

  • Joshua Aizenman
  • Nancy P. Marion

We show that increased uncertainty about the size of an emerging market's external debt has a nonlinear and potentially large adverse effect on the supply of international credit offered to them. We also show that if international creditors are first- order risk averse, attaching greater weight to utility derived from bad outcomes than from good ones, a moderate increase in uncertainty about debt overhang or about other relevant factors affecting repayment prospects-- can cause the supply of credit to dry up completely. We therefore offer one possible explanation for why emerging markets may find themselves suddenly cut off from international capital markets.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (1999)
Issue (Month): Sep ()

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Handle: RePEc:fip:fedfpr:y:1999:i:sep:x:4
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