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LDC Debt in the 1980s: Risk and Reforms

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  • Jeffrey Sachs

Abstract

With the rapid increase in LDC indebtedness in the recent decade, the issues of creditworthiness and country risk have gained new importance. This paper offers a theoretical and historical analysis of international capital markets in the presence of default risk. The theoretical model suggests the possibility of a prisoners' dilemma in the loan market, in which a country's dominant noncooperative strategy is to default, though a welfare-improving cooperative strategy is available. The historical analysis suggests that the IMF may play a key role in guiding creditors and debtor nations to reach cooperative solutions.

Suggested Citation

  • Jeffrey Sachs, 1982. "LDC Debt in the 1980s: Risk and Reforms," NBER Working Papers 0861, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0861
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    References listed on IDEAS

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    1. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    2. World Bank, 1981. "World Development Report 1981," World Bank Publications - Books, The World Bank Group, number 5964, April.
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    Cited by:

    1. Eichengreen, Barry & Portes, Richard, 1986. "The Anatomy of Financial Crises," CEPR Discussion Papers 130, C.E.P.R. Discussion Papers.
    2. Ulrich Lächler & Peter Nunnenkamp, 1987. "The effects of debt versus equity inflows on savings and growth in developing economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 123(4), pages 631-650, December.
    3. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.

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