Developing Country Borrowing and Domestic Wealth

Mark Gertler and Kenneth Rogoff

No 2887, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.

Date: 1989-03
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Published as "Developing Country Borrowing and Domestic Wealth," Proceedings, Federal Bank of San Francisco, 1989.
Published as "North-South Lending and Endogenous Domestic Capital Market Inefficiencies," Journal of Monetary Economics, Vol. 26, No. 2, October 1990.

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Journal Article: Developing country borrowing and domestic wealth (1989)
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