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Borrowing Abroad: The Debtor's Perspective

Cooper, Richard N.; Sachs, Jeffrey D.

This paper addresses the question of external borrowing from the perspective of the borrowing country. The first section sketches a formal framework for optimal borrowing by a developing country, as seen from the planner's point of view. The next three sections use this framework for the development of three important limits on external borrowing: the problem of solvency, the problem of liquidity and the problem created by the possibility of repudiation. The fifth section relates external borrowing to macroeconomic management of the borrowing country, and the sixth section pulls together the many factors that suggest that external debt of a country should be subject to central management or at least surveillance. Following that, we offer some guidelines for limits to the magnitude of external debt, and then discuss the character or mix of external debt. In an appendix, we present various simulation exercises for optimal debt management in a discrete-time infinite-horizon setting.

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More About This Work

Academic Units
Earth Institute
Publisher
National Bureau of Economic Research
Series
NBER Working Paper, 1427
Published Here
September 29, 2009

Notes

This paper was presented at the Conference on Developing Country Debt at the World Bank, Washington, D.C., Spring 1984. Published as part of International Debt and Developing Countries (Washington, D.C.: World Bank, 1985).