TY  - JOUR
AU  - Eaton,Jonathan
TI  - Public Debt Guarantees and Private Capital Flight
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2172
PY  - 1987
Y2  - October 1987
UR  - http://www.nber.org/papers/w2172
L1  - http://www.nber.org/papers/w2172.pdf
N1  - Author contact info:
Jonathan Eaton
Department of Economics
Penn State University
608 Kern Graduate Building
University Park, PA 16802-3306
Tel: (814) 865 - 8871
Fax: (814) 863 - 4775
E-Mail: jxe22@psu.edu
AB  - Significant amounts of private capital have flowed out of several of the more heavily indebted developing countries. This outflow, often called "capital flight ," largely escapes taxation by the borrowing-country government, and has generated concern about the prospects for future servicing of the debt. Imperfect contract enforcement may lead to implicit or explicit government guarantee of foreign debt. The model developed below demonstrates that a government policy of guaranteeing private debt can, in turn, generate more than one outcome. One such outcome replicates the allocation under perfect contract enforcement: national savings is invested domestically and foreign debt is repaid. The tax obligation implied by potential nationalization of private debt, however, can also lead to another outcome in which national capital flees and foreign debt may not be repaid.
ER  -