Donor Herding and Domestic Debt Crisis

10 Pages Posted: 21 Jun 2006

See all articles by Yohane Khamfula

Yohane Khamfula

Stellenbosch University

Montfort Mlachila

International Monetary Fund (IMF)

Ephraim W. Chirwa

University of Malawi

Date Written: April 2006

Abstract

This paper presents a new model based on the loan-pushing model by Basu (1991) to show how a domestic debt crisis can occur in a low-income country following donor herding. The model focuses on the rational herding behavior of donors due to payoff and information externalities. Although there are many theoretical models on herding behavior, these models have not formally considered the relationship between donor herding and domestic debt crisis in a low-income country. This paper is an attempt to fill this gap. The paper shows that due to donor herding behavior a domestic debt crisis can occur once the actual debt level is above the desirable one.

Keywords: Donor herding behavior, domestic debt crisis, loan-pushing model, domestic-debt repayment gap, fiscal expenditure

JEL Classification: E6, F3

Suggested Citation

Khamfula, Yohane and Mlachila, Montfort and Chirwa, Ephraim W., Donor Herding and Domestic Debt Crisis (April 2006). IMF Working Paper No. 06/109, Available at SSRN: https://ssrn.com/abstract=910674

Yohane Khamfula

Stellenbosch University ( email )

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South Africa

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Montfort Mlachila (Contact Author)

International Monetary Fund (IMF) ( email )

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Ephraim W. Chirwa

University of Malawi ( email )

P.O. Box 278
Zomba
Malawi