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Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy

Author

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  • Fernández-Arias, Eduardo
  • Lombardo, Davide

Abstract

An undistorted free market economy endowed with perfectly rational and informed agents overborrows, i.e., borrows beyond the efficient level, because of the agents' failure to internalize credit rationing resulting from sovereign risk. It follows that the elimination of the market overborrowing will not cure private overborrowing. This paper explores the possibilities of economic policy as a remedy to the problem.

Suggested Citation

  • Fernández-Arias, Eduardo & Lombardo, Davide, 1998. "Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy," IDB Publications (Working Papers) 6095, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:6095
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    Cited by:

    1. Martín Uribe, 2006. "On Overborrowing," American Economic Review, American Economic Association, vol. 96(2), pages 417-421, May.
    2. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2013. "Financial crises and macro-prudential policies," Journal of International Economics, Elsevier, vol. 89(2), pages 453-470.
    3. Kim, Yun Jung & Zhang, Jing, 2012. "Decentralized borrowing and centralized default," Journal of International Economics, Elsevier, vol. 88(1), pages 121-133.
    4. Martín Uribe, 2006. "Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrome," NBER Working Papers 12260, National Bureau of Economic Research, Inc.
    5. Fernández, Andrés & Rebucci, Alessandro & Uribe, Martín, 2015. "Are capital controls countercyclical?," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 1-14.

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