TY  - JOUR
AU  - Aizenman,Joshua
TI  - External Debt, Planning Horizon and Distorted Credit Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2662
PY  - 1991
Y2  - February 1991
UR  - http://www.nber.org/papers/w2662
L1  - http://www.nber.org/papers/w2662.pdf
N1  - Author contact info:
Joshua Aizenman
Economics and SIR
USC
University Park
Los Angeles, CA 90089-0043
Tel: 213-740-4066
E-Mail: 	aizenman@usc.edu
AB  - The purpose of this paper is to study the role of policies in the presence of country risk with overdiscounting by the policy maker. Overdiscounting may reflect political uncertainty, which makes the effective planning horizon of the centralized government shorter than that of the private sector. The consequence of overdiscounting is to shift the supply curve facing the economy leftwards. The role of optimal borrowing policies in the presence of country risk is to discourage borrowing for consumption purposes, encourage investment in openness, and discourage investment in activities that reduce openness. The effect of overdiscounting by the policy maker is to increase the values of the optimal policy instruments (i.e. to increase the magnitude of the borrowing taxes and subsidies). Increasing the relative importance of open activities can be viewed as a way to reduce the harmful consequences of overdiscounting. Overdiscounting may rationalize various conditionality clauses that will induce the economy to follow the desired credit market policies.
ER  -