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Threshold effects in international lending

Author

Listed:
  • Spiegel, Mark M.

Abstract

The author's dynamic model of international borrowing subject to credit constraint was developed for an economy with increasing returns to physical capital. Increases in the capital stock within the nonconvex range increase debtor borrowing opportunities. Conversely, a temporary liquidity shock may permanently lower the economy's growth path. Introducing aggregate nonconvexities also has different implications for policy on debt overhangs. In particular, the model allows for rational relending by creditors. It also predicts that new money ( or interest capitalization ) is in the interest of creditors and will be part of a debt restructuring strategy - as it was recently for Mexico and the Philippines.

Suggested Citation

  • Spiegel, Mark M., 1990. "Threshold effects in international lending," Policy Research Working Paper Series 394, The World Bank.
    • Handle: RePEc:wbk:wbrwps:394
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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