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The Pure Theory of Country Risk

  • Jonathan Eaton
  • Mark Gersovitz
  • Joseph E. Stiglitz

This paper attempts to survey, and to put into perspective, recent lterature that has analyzed the nature of credit relations between developed and developing countries.This analysis has made use of recent advances in the economics of information and strategic interaction. Traditional concepts of solvency and liquidity are of little help in understanding problems of soverign debt. Creditors do not have the means to seize the assets of a borrower in default. Hence the borrower who is expected eventually to repay his debts should be able to borrow to meet any current debt-service obligations. A problem that is essential to a theory of international lending is that of enforcement. The difficulty is one of ensuring that the two sides of a loan contract adhere to it, in particular that the borrower repays the lender and the lenders can commit themselves to penalize the borrower if he does not.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1894.

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Date of creation: Apr 1986
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Publication status: published as Eaton, Jonathan, Mark Gersovitz and Joseph E. Stiglitz. "The Pure Theory of Country Risk," European Economic Review: International Seminar on Macroeconomics, Vol. 30, No. 3, pp. 481-514, June 1986.
Handle: RePEc:nbr:nberwo:1894
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