Gao, Xiang (2009): Private Debt with Default Risk within and across Border.
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Following Jeske's (2006) decentralized international risk sharing arrangement where residents have access to international capital markets, this paper studies the presence of resident default risk on borrowing happened between domestic agents, in addition to default risk on private debt contracts across border. The paper shows that, without the assumption of perfect domestic contract enforcement, more international risk sharing and higher welfare can be supported. Moreover, the domestic interest rate equals to the highest marginal rate of substitution in countries that are participation constrained in international financial markets. This asset pricing result overturns the well established argument that interest rate should be the lowest to induce repayment in closed economy models with domestic credit crisis.
|Item Type:||MPRA Paper|
|Original Title:||Private Debt with Default Risk within and across Border|
|English Title:||Private Debt with Default Risk within and across Border|
|Keywords:||Default risk; private debt; limited commitment|
|Subjects:||F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Depositing User:||XIANG GAO|
|Date Deposited:||06. Sep 2009 18:54|
|Last Modified:||27. Feb 2013 06:55|
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