Working Paper: NBER ID: w1189
Authors: Jeffrey Sachs
Abstract: The current crisis in international lending points up a lesson re-learned several times in the past 150 years: the international loan markets function very differently from the textbook model of competitive lending. This paper discusses various extensions of the basic model.First, we amend the textbook model to show how limitations on a government'staxing authority may greatly affect its optimal borrowing strategy.Second, we explore the implications of adebtor country's option to repudiate debt.Third, we show that efficient lending may require collective actions by bank syndicates, and that a breakdown in collective action can result in serious inefficiencies and even financial panics.
Keywords: international borrowing; sovereign risk; debt repudiation; credit rationing; collective action
JEL Codes: F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Limitations on a government's taxing authority (H20) | Optimal borrowing strategy (G51) |
| Optimal borrowing strategy (G51) | Economic growth (O49) |
| Option for a debtor country to repudiate debt (F34) | Borrowing behavior (G51) |
| Risk of repudiation (G33) | Incentives for borrowers (G51) |
| Incentives for borrowers (G51) | Overborrowing (H74) |
| Incentives for borrowers (G51) | Overinvestment in risky projects (G31) |
| Incentives for borrowers (G51) | Underinvestment overall (G31) |
| Collective action problems among banks (F65) | Inefficient lending outcomes (G21) |
| Inefficient lending outcomes (G21) | Financial panics (G01) |
| Financial panics (G01) | Default due to lack of credit (G19) |