Heterogeneity and intertemporal trade: finding support for international credit contracts

Abstract

This paper examines the role heterogeneity plays in supporting intertemporal trades between countries when no legal contracts bind sovereign debtors. In a dynamic general equilibrium model, countries smooth consumption over time by choosing optimal investment and bond sales or purchases. Countries which follow efficient investment plans and borrow with the intention of repaying debts may nevertheless find default to be in their best interest. Credit ceilings which eliminate default eliminate some if not all intertemporal trades. Positivecredit ceilings arise only when there is sufficient intertemporal heterogeneity to insure that a country’s future includes foreign and domestic investment. (JEL FlO, F30).

Publisher

Elsevier

Publication Date

4-1-1994

Publication Title

Journal of International Money and Finance

Department

Economics

Document Type

Article

DOI

https://dx.doi.org/10.1016/0261-5606(94)90014-0

Language

English

Format

text

Link to Full Text

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