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Uncertainty and the Disappearance of International Credit

  • Joshua Aizenman
  • Nancy P. Marion

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7389.

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Date of creation: Oct 1999
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Publication status: published as Proceedings, Federal Reserve Bank of San Francisco, 1999 Pacific Basin Conference, September 23-24, 1999
Handle: RePEc:nbr:nberwo:7389
Note: IFM
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