Working Paper: NBER ID: w12260
Authors: MartÃn Uribe
Abstract: This paper compares the equilibrium dynamics of an economy facing an aggregate collateral constraint on external debt to the dynamics of an economy facing a collateral constraint imposed at the level of each individual agent. The aggregate collateral constraint is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators as opposed to individual abilities to pay. Individual agents do not internalize the aggregate borrowing constraint. Instead, in this economy a country interest-rate premium emerges to clear the financial market. The central finding of the paper is that the economy with the aggregate borrowing limit does not generate higher levels of debt than the economy with the individual borrowing limit. That is, there is no overborrowing in equilibrium.
Keywords: collateral constraints; overborrowing; emerging markets
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate collateral constraint (D10) | no overborrowing (G51) |
| individual collateral constraint (D10) | no overborrowing (G51) |
| interest rate (E43) | individual saving decisions (D14) |
| individual saving decisions (D14) | no overborrowing (G51) |
| debt limit internalization (F34) | opportunity cost of funds independence (G19) |
| debt limit binding (H63) | simultaneous constraint for all agents (C73) |