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

IADB Working Paper No. 369

Posted: 1 Mar 2001

See all articles by Eduardo Fernandez-Arias

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB)

Davide Lombardo

European University Institute

Multiple version iconThere are 2 versions of this paper

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.

JEL Classification: F34, G15, E44, O16

Suggested Citation

Fernandez-Arias, Eduardo and Lombardo, Davide, Private External Overborrowing in Undistorted Economies: Market Failure and Optimal Policy (March 1998). IADB Working Paper No. 369, Available at SSRN: https://ssrn.com/abstract=237449

Eduardo Fernandez-Arias (Contact Author)

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States
202-623-3783 (Phone)
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Davide Lombardo

European University Institute ( email )

Badia Fiesolana
Via dei Roccettini 9
I-50016 San Domenico Fiesole, Tuscany 50014
Italy

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