Essays in international finance and search theory.
This dissertation contains three essays that can be read independently. The first chapter examines how a debt crisis can occur and persist as a result of unanticipated, transitory, real interest rate and commodity price shocks. Using an optimal stopping framework, the debtor country's optimal decision to default or to resume debt service can be analyzed to show the existence of a hysteresis region. In this context, a hysteresis region refers to a region in price interest rate space that is consistent with both debt service and default. The existence of this hysteresis region emerges because of the presence of settlement costs and explains the persistence of the debt crisis. The effect on the hysteresis region of debt forgiveness, increased domestic production, easier debt settlement terms and an increase in the cost of default shows how these proposals may mitigate the debt crisis. The paper also develops a Monte Carlo based algorithm to solve an interrelated optimal stopping problem for the case of two sources of uncertainty.The second chapter investigates the strategic renegotiation of international debt. The international debt crisis has been complicated by the presence of multiple creditors, the inherent difficulty of enforcing international debt contracts and the effect of the crisis on incentives to invest. The incentives for investment and continued lending as well as the problems of creditor coordination must be examined to fully understand why rescheduling but little new investment has occurred. This study addresses these issues using a game theoretic model containing two creditors rather than one. The study suggests that the presence of two creditors can reduce the probability of sovereign default. However when default occurs, independent action by creditors during the renegotiation process can lead to less re-investment occurring than if creditors collude. This result suggests that the problem of achieving collective action among creditors during renegotiation can lead to the rescheduling but little new lending that has been observed.The third chapter investigates a multiple good search problem. An optimal multiple good search strategy is shown to exist when consumers search for one good at a time, have n goods to search for and have a positive cost to search. The optimal search strategy is characterized by and index-reservation price rule. Search effort is allocated among the n price distributions by an index. Search for each good is terminated by a reservation price rule. The index is a function of the reservation price and the probability of obtaining the reservation price on the next draw.
Year of publication: |
1992-01-01
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Authors: | Wicas, Nelson Walter |
Publisher: |
ScholarlyCommons |
Subject: | Theory |
Saved in:
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