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Donor Herding and Domestic Debt Crisis

Author

Listed:
  • Mr. Ephraim W. Chirwa
  • Mr. Montfort Mlachila
  • Yohane Anthony Khamfula

Abstract

This paper presents a new model based on the loan-pushing model by Basu (1991) to show how a domestic debt crisis can occur in a low-income country following donor herding. The model focuses on the rational herding behavior of donors due to payoff and information externalities. Although there are many theoretical models on herding behavior, these models have not formally considered the relationship between donor herding and domestic debt crisis in a low-income country. This paper is an attempt to fill this gap. The paper shows that due to donor herding behavior a domestic debt crisis can occur once the actual debt level is above the desirable one.

Suggested Citation

  • Mr. Ephraim W. Chirwa & Mr. Montfort Mlachila & Yohane Anthony Khamfula, 2006. "Donor Herding and Domestic Debt Crisis," IMF Working Papers 2006/109, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2006/109
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    References listed on IDEAS

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    1. Xavier Vives, 1993. "How Fast do Rational Agents Learn?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(2), pages 329-347.
    2. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    3. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
    4. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    5. Chamley, Christophe & Gale, Douglas, 1994. "Information Revelation and Strategic Delay in a Model of Investment," Econometrica, Econometric Society, vol. 62(5), pages 1065-1085, September.
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    Cited by:

    1. Ortiz, Isabel, & Cummins, Matthew. & Karunanethy, Kalaivani., 2015. "Fiscal space for social protection and the SDGs options to expand social investments in 187 countries," ILO Working Papers 994877663402676, International Labour Organization.
    2. Yohane Khamfula, 2006. "Fiscal uncertainty with donor herding and domestic debt crisis," Working Papers 07/2006, Stellenbosch University, Department of Economics.
    3. Fenny Marietza & Ridwan Nurazi & Fitri Santi & Saiful, 2021. "Bibliometric Analysis Of Herding Behavior In Times Of Crisis," Papers 2106.13598, arXiv.org.
    4. Isabel Ortiz & Jingqing Chai & Matthew Cummins, 2011. "Identifying Fiscal Space:Options for Social and Economic Development for Children and Poor Households in 184 Countries," Working papers 1108, UNICEF,Division of Policy and Strategy.

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