Theoretical Issues in International Borrowing

Abstract

The current crisis in international 'ending points up a lesson re-learned several times in the past 150 years: the international loan markets function very differently from the textbook model of competitive lending.This paper discusses various extensions of the basic model.First, we amend the textbook model to show how limitations on a government's taxing authority may greatly affect its optima].borrowing strategy.Second, we explore the implications of a debtor country's option to repudiate debt.Third, we show that efficient lending may require collective actions by bank syndicates, and that a breakdown in collective action can result in serious inefficiencies and even financial panics.

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