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Uncertainty and the disappearance of international credit

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  • Joshua Aizenman
  • Nancy P. Marion

Abstract

We show that increased uncertainty about the size of an emerging market's external debt has a nonlinear and potentially large adverse effect on the supply of international credit offered to them. We also show that if international creditors are first- order risk averse, attaching greater weight to utility derived from bad outcomes than from good ones, a moderate increase in uncertainty about debt overhang or about other relevant factors affecting repayment prospects-- can cause the supply of credit to dry up completely. We therefore offer one possible explanation for why emerging markets may find themselves suddenly cut off from international capital markets.
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Suggested Citation

  • Joshua Aizenman & Nancy P. Marion, 1999. "Uncertainty and the disappearance of international credit," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    • Handle: RePEc:fip:fedfpr:y:1999:i:sep:x:4
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    References listed on IDEAS

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    Cited by:

    1. Joshua Aizenman, 1999. "Capital Controls and Financial Crises," NBER Working Papers 7398, National Bureau of Economic Research, Inc.
    2. Serhan Cevik & Richard D. F. Harris & Fatih Yilmaz, 2017. "Soft power and exchange rate volatility," International Finance, Wiley Blackwell, vol. 20(3), pages 271-288, December.
    3. Marion, Nancy P., 2000. "Optimal currency crises A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 231-238, December.
    4. Pierre-Richard Agénor & Joshua Aizenman, 2005. "Financial sector inefficiencies and the debt Laffer curve," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 1-13.
    5. Theo S Eicher & Uwe Walz & Stephen Turnovsky, 2000. "Financial Liberalization and Capital Flow Reversals:," Working Papers 0003, University of Washington, Department of Economics.
    6. Emmanuel Buabeng & Enock Kojo Ayesu & Opoku Adabor, 2019. "The Effect of Exchange Rate Fluctuation on the Performance of Manufacturing Firms: An Empirical Evidence from Ghana," Economics Literature, WERI-World Economic Research Institute, vol. 1(2), pages 133-147, December.

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    More about this item

    Keywords

    Debt; Risk; Banks and banking; International;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance

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