Leaders’ Foreign Travel and Foreign Debt

This paper examines the effect of foreign travel by the leader or the head of state to the United States on the ability of the country to attract foreign loans. The key difficulty in determining a causal effect is the issue of endogeneity. As much as the leader’s trips abroad may attract foreign loans, it is also possible that leaders are tempted to visit countries known to be major creditors. To deal with potential endogeneity, we introduce a novel instrumental variable for the number of leader’s trips. The instrument is urban distance defined as the gap between the level of urban development in the country of the leader relative to that in the United States. We conduct a 2SLS where the urban distance serves as a source of exogenous variation in leader’s trips. The estimation provides evidence of a statistically significant positive coefficient of leader’s trips. This result implies that these trips by the leaders signal to the creditors their commitment to use the borrowed funds properly and to repay these funds in due time. Our results are robust even after the inclusion of other control variable, using alternative samples, and accounting for the potential of instrument weakness.