Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy

38 Pages Posted: 20 Apr 2011

See all articles by Eduardo Fernandez-Arias

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB)

Davide Lombardo

European University Institute

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Date Written: March 1998

Abstract

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

Fernandez-Arias, Eduardo and Lombardo, Davide, Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy (March 1998). IDB Working Paper No. 305, Available at SSRN: https://ssrn.com/abstract=1815996 or http://dx.doi.org/10.2139/ssrn.1815996

Eduardo Fernandez-Arias (Contact Author)

Inter-American Development Bank (IDB) ( email )

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Davide Lombardo

European University Institute ( email )

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Italy

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