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Sovereign Risk and Simple Debt Dynamics in Asia

  • Kool Clemens
  • Ziesemer Thomas
  • Haselmann Rainer
  • Holle Stephanie

    (MERIT)

In this paper we develop a simple neoclassical growth model with perfect internationalcapital mobility to analyze the international debt dynamics of developing countries ingeneral and Korea, Malaysia and Thailand in particular. We show that three differentregimes can be distinguished: a stable steady state debtor regime, a stable steady statecreditor regime and an unstable regime. A switch from a stable debtor or a stable creditorposition to an unstable creditor regime may be a sign of forthcoming trouble. Weinvestigate this issue empirically for the three Asian countries in the run-up to the 1997Asia crisis, using data over the period 1975-2000. Over the full sample, the evidencesuggests that debt dynamics evolved according to the stable debtor case in each country.Using a rolling regression technique, we find that indeed occasional switches to theunstable regime occurred. More in particular, we demonstrate that all three countriesinvestigated here were facing deteriorating domestic fundamentals – reflected inpotentially unstable debt dynamics – prior to the breakout of the Asia crisis. As such, ourapproach appears to offer an interesting early warning indicator for financial (debt) crises.

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Paper provided by Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT) in its series Research Memorandum with number 002.

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Date of creation: 2003
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Handle: RePEc:unm:umamer:2003002
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  1. Kenneth Rogoff & Charles Wyplosz, 1996. "International Seminar on Macroeconomics," NBER Books, National Bureau of Economic Research, Inc, number rogo96-1, October.
  2. Fischer, Stanley & Frenkel, Jacob A, 1974. "Interest Rate Equalization and Patterns of Production, Trade and Consumption in a Two-country Growth Model," The Economic Record, The Economic Society of Australia, vol. 50(132), pages 555-80, December.
  3. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  5. Onitsuka, Yusuke, 1974. "International Capital Movements and the Patterns of Economic Growth," American Economic Review, American Economic Association, vol. 64(1), pages 24-36, March.
  6. Vogelsang, T.I. & Perron, P., 1991. "Nonstationary and Level Shifts With An Application To Purchasing Power Parity," Papers 359, Princeton, Department of Economics - Econometric Research Program.
  7. Oetzel, Jennifer M. & Bettis, Richard A. & Zenner, Marc, 2001. "Country risk measures: how risky are they?," Journal of World Business, Elsevier, vol. 36(2), pages 128-145, July.
  8. Hori, Hajime & Stein, Jerome L, 1977. "International Growth with Free Trade in Equities and Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(1), pages 83-100, February.
  9. Neher, Philip A, 1970. "International Capital Movements along Balanced Growth Paths," The Economic Record, The Economic Society of Australia, vol. 46(115), pages 393-401, September.
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