Working Paper: NBER ID: w13197
Authors: Michael P. Dooley; Peter M. Garber; David Folkerts-Landau
Abstract: In this essay, we argue that key assumptions in international macroeconomic theory, though useful for understanding the economic relationships among developed countries, have been pushed beyond their competence to include relationships between developed economies and emerging markets. The Achilles heel of this extended development model is the assumption that threats to deprive the debtor countries of gains from trade provide incentives for poor countries to repay more than trivial amounts of international debt. Replacing this assumption with the idea that collateral is required to support gross international capital flows suggests that the pattern of current account balances seen in recent years is a sustainable equilibrium.
Keywords: International Economics; Sovereign Debt; Collateral; Capital Flows
JEL Codes: F02; F21; F32; F33; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of collateral (G33) | incentives for default (G33) |
| need for collateral (G33) | ability of poorer countries to engage in international capital flows (F32) |
| net capital outflows from poorer countries (F32) | collateral (G33) |
| collateral (G33) | ability to repay sovereign debt (F34) |
| current account deficits of developed countries (F32) | collateralization of emerging market investments (G15) |