Heterogeneity and intertemporal trade: finding support for international credit contracts
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).
Craig, Barbara J. 1994. "Heterogeneity and intertemporal trade: finding support for international credit contracts." Journal of International Money and Finance 13(2): 171-189.
Journal of International Money and Finance