Public Debt Guarantees and Private Capital Flight

36 Pages Posted: 10 Jul 2007 Last revised: 28 Mar 2010

See all articles by Jonathan Eaton

Jonathan Eaton

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

Date Written: March 1987

Abstract

Significant amounts of private capital have flowed out of several of the more heavily indebted developing countries. This outflow, often called "capital flight ," largely escapes taxation by the borrowing-country government, and has generated concern about the prospects for future servicing of the debt. Imperfect contract enforcement may lead to implicit or explicit government guarantee of foreign debt. The model developed below demonstrates that a government policy of guaranteeing private debt can, in turn, generate more than one outcome. One such outcome replicates the allocation under perfect contract enforcement: national savings is invested domestically and foreign debt is repaid. The tax obligation implied by potential nationalization of private debt, however, can also lead to another outcome in which national capital flees and foreign debt may not be repaid.

Suggested Citation

Eaton, Jonathan, Public Debt Guarantees and Private Capital Flight (March 1987). NBER Working Paper No. w2172. Available at SSRN: https://ssrn.com/abstract=346979

Jonathan Eaton (Contact Author)

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

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