Bachelor of Arts
Debt, Foreign, Investment, Repayment, Countries, Foreign debt
This paper attempts to investigate the relationship between foreign debt and repayment problems on investment behavior in Less Developed Countries (LDCs). It is primarily motivated by earlier studies which have found empirical evidence of such a relationship, but did not attempt to incorporate it into a theoretical model which could shed light on the functioning of developing macroeconomies. An effort will be made to address this possibility by modeling the determinants of private investment in LDCs in a way that will allow an examination of the effects of high external debt and repayment problems on private investment. This will be achieved by assuming a parallel informal market for savings which operates by means of a simultaneous equations model of supply and demand. Conceptually, such a model is just an extension of previous attempts to understand the parallel capital markets that arise in the context of interest rate controls and credit rationing common in LDCs. The equations of the resultant private investment model will consider external debt and repayment problems explicitly in terms of their effects on credit ceilings, which are likely to be applicable due to the possibility of countries defaulting on their foreign debt.
Savings will be assumed to clear through arbitrage in the informal capital market by means of an unobserved interest rate. This will provide a means of analyzing investment while avoiding some of the problems which commonly arise while looking at investment in developing countries. Substitution for the unobserved market clearing interest rate will allow the formulation of a reduced form equation, the signs of whose coefficients may be predicted from the original supply and demand equations. Since the reduced form equation contains only observable variables, its coefficients may be empirically determined.
Hasan, Zeeshan, "Foreign Debt Rescheduling and Private Investment in LDCs" (1993). Honors Papers. 553.