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Borrowing iwth Unobserved Liquidity Constraints: Structural Estimation with an Application to Sovereign Debt

  • Jerome Adda
  • Jonathan Eaton

We develop a framework for estimating the optimal expenditure of agents subject to unobserved liquidity constraints. Our framework allows us to estimate credit ceilings as well as preference parameters. We apply the framework to data on net resource transfers from private lenders to twenty-nine sovereign debtors during 1973-1993. We obtain reasonable estimates of the discount factor, elasticity of marginal utility of expenditure, and the credit ceiling for most countries. Our estimated credit ceilings rise quite regularly with income across the countries of our sample, and are positively associated with a country's trade, in line with several theoretical arguments. Our estimates imply that slilghtly less than half the countries in our sample were liquidity constrained during the 1970s. The fraction rose to around 80 per cent in the mid 1980s, and subsequently declined.

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Paper provided by Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 84.

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Date of creation: Mar 1998
Date of revision:
Handle: RePEc:fth:bosecd:84
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  6. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  7. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  8. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
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  10. 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.
  11. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
  12. Cohen, Daniel, 1992. "The Debt Crisis: A Post Mortem," CEPR Discussion Papers 692, C.E.P.R. Discussion Papers.
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  17. Daniel Cohen & Jeffrey Sachs, 1985. "Growth and External Debt Under Risk of Debt Repudiation," NBER Working Papers 1703, National Bureau of Economic Research, Inc.
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  27. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
  28. Hajivassiliou, Vassilis A., 1987. "The external debt repayments problems of LDC's : An econometric model based on panel data," Journal of Econometrics, Elsevier, vol. 36(1-2), pages 205-230.
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  30. Marjorie Flavin, 1985. "Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 117-36, February.
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