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On Overborrowing

  • Martin Uribe

This paper characterizes the equilibrium dynamics in an economy facing an aggregate debt ceiling. This borrowing limit is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators. Individual agents do not internalize the borrowing constraint. Instead, a country interest-rate premium emerges to clear the financial market. The implied equilibrium dynamics are compared to those arising from a model in which the debt ceiling is imposed at the level of each individual agent. The central finding of the paper is that the economy with the aggregate borrowing limit does not generate higher levels of debt than the economy with the individual borrowing limit. That is, there is no overborrowing in equilibrium.

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File URL: http://www.nber.org/papers/w11913.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11913.

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Date of creation: Jan 2006
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Publication status: published as Uribe, Martin. "On Overborrowing," American Economic Review, 2006, v96(2,May), 417-421.
Handle: RePEc:nbr:nberwo:11913
Note: EFG IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Eduardo Fernández-Arias & Davide Lombardo, 1998. "Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy," IDB Publications (Working Papers) 6808, Inter-American Development Bank.
  2. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  3. Finn E. Kydland & Calos E.J.M.Zarazaga, 1997. "Is the business cycle of Argentina "different?"," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 21-36.
  4. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
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