Investment, Openness, and Country Risk
Author: Mr. Joshua Aizenman1
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Language:
English
Keywords:
BOOK; debt; debtor country; market; default penalty; default decision; investment project; probability of default; borrowing tax; Credit; Consumption; Stocks; Credit ceilings

Abstract

This study draws attention to the linkages between country risk and the openness of an economy and demonstrates that in the long run the openness of an economy is endogenously determined by the interaction between endowments and policies. The presence of country risk poses a problem for the smooth operation of international credit markets: the ex-ante first best policy is for countries to pre-commit themselves to no-default policies. Such a commitment, however, may not be credible because it may not be the optimal ex-post policy. This suggests, as a way to increase the credibility of a no-default commitment, a special role for policies leading toward investment in openness. The paper studies the optimal implementation of these policies.

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Cover Analytical Issues in Debt
Analytical Issues in Debt
Editor: Mr. Peter Wickham, Mr. Jacob A. Frenkel, and Mr. Michael P. Dooley
ISBN:
9781557750419
Publication Date:
15 Mar 1989
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781557750419.071
Pages:
427