Foreign debt supply in an imperfect international capital market: Theory and evidence
We investigate the determinants of foreign borrowing costs in a stochastically growing economy. We find that these increase with the debt-wealth ratio, depending also upon the volatilities of domestic and foreign origin, and the length of debt contract. In addition, the sensitivity of the short-term debt supply to the debt-wealth ratio exceeds that of long-term debt, and the effects of volatility on the borrowing premium, growth of wealth, and its volatility, depend on the relative size of a direct effect and a secondary portfolio-adjustment effect of the initial shock, as well as the length of the debt contract. Panel regressions suggest that the empirical evidence generally support the theoretical predictions.
Year of publication: |
2010
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Authors: | Chung, Keunsuk ; Turnovsky, Stephen J. |
Published in: |
Journal of International Money and Finance. - Elsevier, ISSN 0261-5606. - Vol. 29.2010, 2, p. 201-223
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Publisher: |
Elsevier |
Keywords: | Arbitrage Capital market imperfection Default risk Foreign debt Volatility |
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