Developing Country Borrowing and Domestic Wealth

34 Pages Posted: 11 Apr 2004

See all articles by Mark Gertler

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1989

Abstract

We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.

Suggested Citation

Gertler, Mark and Rogoff, Kenneth S., Developing Country Borrowing and Domestic Wealth (March 1989). NBER Working Paper No. w2887. Available at SSRN: https://ssrn.com/abstract=301414

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Kenneth S. Rogoff

Harvard University - Department of Economics ( email )

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