Uncertainty and the Disappearance of International Credit
We show that increased uncertainty about the size of an emerging market's external debt has a nonlinear and potentially large adverse effect on the supply of international credit offered to them. We also show that if international creditors are first- order risk averse, attaching greater weight to utility derived from bad outcomes than from good ones, a moderate increase in uncertainty about debt overhang or about other relevant factors affecting repayment prospects-- can cause the supply of credit to dry up completely. We therefore offer one possible explanation for why emerging markets may find themselves suddenly cut off from international capital markets.
|Date of creation:||Oct 1999|
|Date of revision:|
|Publication status:||published as Proceedings, Federal Reserve Bank of San Francisco, 1999 Pacific Basin Conference, September 23-24, 1999|
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