A Theory of International Official Lending

Qing Liu, Zanhui Liu and Vivian Yue

No 35667, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Official lending is large, senior, and countercyclical, continuing after sovereigns fall into arrears on private debt. We ask why sovereign finance exhibits this division of labor across creditors. In a production economy where a risk-averse sovereign privately allocates imported inputs, commitment is limited on both sides, and monitoring generates a noisy signal, the constrained-optimal allocation is decentralized by defaultable private debt, senior non-defaultable multilateral debt, and concessional bilateral debt whose relief is tied to the signal. Production remains distorted, but the sovereign is never excluded: official lending is monitored liquidity provision. A calibration reproduces procyclical private and countercyclical official debt.

JEL-codes: F21 F32 F34 F41 F44 (search for similar items in EconPapers)
Date: 2026-08
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