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International Debt and the Price of Domestic Assets

Roberto Garcia-Saltos and Leonardo Auernheimer

No 2000/177, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the behavior of indebtedness, consumption, and asset prices in a small open economy in which the foreign real interest rate depends not only on an exogenous world interest rate and on indebtedness, but also on the value of the capital stock, viewed as an implicit “collateral,” and hence on the price of capital. The paper finds that the collateral effect magnifies the intensity of shocks to the economy and the duration of their impact. The collateral effect also generates additional distortions that could lead to overborrowing. The paper discusses the policy responses to these distortions.

Keywords: WP; physical capital; Collateral; Asset Prices; International Debt; Financial Accelerator; price of capital; asset price arbitrage condition; interest rate decrease; asset-price distortion; world interest rate; distortion issue; equilibrium interest rate; price externality; Debt burden; Consumption; Tax arrears management (search for similar items in EconPapers)
Pages: 29
Date: 2000-10-01
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Handle: RePEc:imf:imfwpa:2000/177