Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy

Eduardo Fernandez-Arias and Davide Lombardo

No 6095, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: An undistorted free market economy endowed with perfectly rational and informed agents overborrows, i.e., borrows beyond the efficient level, because of the agents' failure to internalize credit rationing resulting from sovereign risk. It follows that the elimination of the market overborrowing will not cure private overborrowing. This paper explores the possibilities of economic policy as a remedy to the problem.

Keywords: borrowing markets; WP-369; taxes; lending markets; capital flight (search for similar items in EconPapers)
Date: 1998-03
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:6095

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