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Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries

  • Eduardo Levy Yeyati

    ()

According to reputation models of sovereign debt, the incentives to repay are proportional to the income insurance benefits provided by access to international markets. This paper, however, documents that private net lending to developing countries exhibits a procyclical or acyclical pattern, contradicting this premise. By contrast, official debt net flows exhibit a countercyclical patter. In addition, the paper shows that (both current and past) defaults are associated with lower net debt flows. The findings, which are robust to various additional controls, cast doubt on the reputation view of sovereign debt markets. At the same time, they suggest that reputation may account for the success of the (implicit) preferred creditor status enjoyed by multilateral lenders.

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File URL: http://hdl.handle.net/10.1007/s11079-008-9086-4
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 20 (2009)
Issue (Month): 4 (September)
Pages: 489-507

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Handle: RePEc:kap:openec:v:20:y:2009:i:4:p:489-507
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  1. Stephen Morris & Hyun Song Shin, 2004. "Catalytic Finance: When Does It Work?," Yale School of Management Working Papers ysm339, Yale School of Management.
  2. Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April.
  3. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," Research Department Publications 4203, Inter-American Development Bank, Research Department.
  4. Ozler, Sule, 1993. "Have Commercial Banks Ignored History?," American Economic Review, American Economic Association, vol. 83(3), pages 608-20, June.
  5. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  6. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  7. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  8. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  10. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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