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Foreign debt supply in an imperfect international capital market: Theory and evidence

Keunsuk Chung and Stephen J Turnovsky ()

Journal of International Money and Finance, 2010, vol. 29, issue 2, 201-223

Abstract: We investigate the determinants of foreign borrowing costs in a stochastically growing economy. We find that these increase with the debt-wealth ratio, depending also upon the volatilities of domestic and foreign origin, and the length of debt contract. In addition, the sensitivity of the short-term debt supply to the debt-wealth ratio exceeds that of long-term debt, and the effects of volatility on the borrowing premium, growth of wealth, and its volatility, depend on the relative size of a direct effect and a secondary portfolio-adjustment effect of the initial shock, as well as the length of the debt contract. Panel regressions suggest that the empirical evidence generally support the theoretical predictions.

Keywords: Arbitrage; Capital; market; imperfection; Default; risk; Foreign; debt; Volatility (search for similar items in EconPapers)
Date: 2010
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