Working Paper: NBER ID: w0861
Authors: Jeffrey Sachs
Abstract: With the rapid increase in LDC indebtedness in the recent decade, the issues of creditworthiness and country risk have gained new importance. This paper offers a theoretical and historical analysis of international capital markets in the presence of default risk. The theoretical model suggests the possibility of a prisoners' dilemma in the loan market, in which a country's dominant noncooperative strategy is to default, though a welfare-improving cooperative strategy is available. The historical analysis suggests that the IMF may play a key role in guiding creditors and debtor nations to reach cooperative solutions.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| LDC creditworthiness (F34) | risk of default (G33) |
| actions of creditors (G33) | risk of default (G33) |
| risk of default (G33) | systemic risks in international banking system (F65) |
| defaults (Y60) | economic risks to creditors (G33) |
| non-cooperative strategy for LDCs (L59) | overall welfare (I31) |
| major defaults (G33) | cascading failures among banks (F65) |