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A Theory of International Official Lending

Author

Listed:
  • Qing Liu
  • Zanhui Liu
  • Vivian Zhanwei Yue

Abstract

Official lending is large, senior, and countercyclical, continuing after sovereigns fall into arrears on private debt. We ask why sovereign finance exhibits this division of labor across creditors. In a production economy where a risk-averse sovereign privately allocates imported inputs, commitment is limited on both sides, and monitoring generates a noisy signal, the constrained-optimal allocation is decentralized by defaultable private debt, senior non-defaultable multilateral debt, and concessional bilateral debt whose relief is tied to the signal. Production remains distorted, but the sovereign is never excluded: official lending is monitored liquidity provision. A calibration reproduces procyclical private and countercyclical official debt.

Suggested Citation

  • Qing Liu & Zanhui Liu & Vivian Zhanwei Yue, 2026. "A Theory of International Official Lending," NBER Working Papers 35667, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35667
    Note: IFM
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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