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Donor Herding and Domestic Debt Crisis
Author:
Mr. Ephraim W. Chirwanull

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,
Mr. Montfort Mlachila
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, and
Yohane Anthony Khamfulanull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 109
Language:
English
Publication Date:
01 Apr 2006
DOI:
https://doi.org/10.5089/9781451863697.001
ISBN:
9781451863697
ISSN:
1018-5941
Pages:
10
Keywords:
WP; expected return; real interest rate
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2006: Issue 109