Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy
38 Pages Posted: 20 Apr 2011
Date Written: March 1998
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.
Suggested Citation: Suggested Citation