Developing Countries' Borrowing in the International Financial Market with an Uncertain Credit Ceiling

Alberto Isgut

International Journal of Finance & Economics, 2001, vol. 6, issue 2, 171-83

Abstract: In the sovereign debt literature of the 1980s, countries formulated optimal borrowing plans subject to a credit ceiling imposed by their lenders. This paper analyzes the case where the credit ceiling is not known with certainty. The baseline deterministic model shows that consumption, investment and the current account deficit depend positively on the credit ceiling, implying more optimistic expectations about the country's future access to external financing led to larger current account deficits today. An extension of the model shows that when the country recognizes the uncertainty about future access to borrowing, optimal current account deficits are more moderate. Copyright @ 2001 by John Wiley & Sons, Ltd. All rights reserved.

Date: 2001
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