NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Developing Country Borrowing and Domestic Wealth

Mark Gertler, Kenneth Rogoff

NBER Working Paper No. 2887
Issued in March 1989
NBER Program(s):   ITI   IFM

We show that across developing countries, external debt to private creditors rises more than proportionately with income. We then develop a simple theoretical model consistent with this phenomenon and also consistent with the well-documented relationship between capital market development and growth. Our framework stresses information asymmetries at the level of individual borrowers as the source of frictions in world capital markets. Because of moral hazard problems, marginal products of capital and borrowing-lending spreads are higher in poorer countries. In a two-country version of the model, we demonstrate the possibility of a siphoning effect which exacerbates the costs of transfers. Also because of the siphoning effect, increased wealth in the rich country can stunt investment in the poor country.

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Document Object Identifier (DOI): 10.3386/w2887

Published:

  • "Developing Country Borrowing and Domestic Wealth," Proceedings, Federal Bank of San Francisco, 1989. ,
  • "North-South Lending and Endogenous Domestic Capital Market Inefficiencies," Journal of Monetary Economics, Vol. 26, No. 2, October 1990.

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