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Title: |
Country Risk and Contingencies |
| Author: |
Aizenman,
Joshua |
| Author
Affiliation: |
Hebrew U; NBER |
| Source: |
International Economic Journal, Spring 1989, v. 3, no. 1, pp. 81-102 |
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Publication Date: |
Spring 1989 |
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Abstract: |
This paper investigates the role of credit
market policies in the presence of country risk. We show that if a given
investment reduces (increases) the probability of default it generates
positive (negative) externality calling for a subsidy (tax) on borrowing
used to finance that investment. We demonstrate that variable default
schemes that tie the penalty to the default rate are disadvantageous,
whereas a contingency plan that make the interest rate contingent upon
realization of shocks is advantageous. Allowing for contingent payment
has the effect of raising the credit ceiling, raising the expected
income, and stabilizing income. |
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