Citation

Discussion Paper Details

Please find the details for DP582 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: External Debt and Political Instability

Author(s): Sule Ozler and Guido Tabellini

Publication Date: October 1991

Keyword(s): Developing Countries, External Debt, Investment and Politics

Programme Area(s): International Macroeconomics

Abstract: This paper provides a theoretical and empirical analysis of the role played by domestic political incentives in the accumulation of large external debts by developing countries between 1972 and 1981. The theoretical model characterizes two equilibrium regimes. In one the borrower is on its demand curve and changes in the loan size desired by the borrower are accommodated by lenders. In the other regime the borrower is credit rationed, and the loan size is determined by the perceived country risk. Increased political instability increases the equilibrium loan size in the first regime and decreases it in the second. Using out-of-sample evidence, we identify the two regimes in the data. We then find that in the unconstrained regime political instability has a significant effect on the loan size, whereas it has no significant effect in the credit rationing regime. Hence the evidence indicates a positive effect of political instability on the demand for sovereign loans, as predicted by the theory.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=582

Bibliographic Reference

Ozler, S and Tabellini, G. 1991. 'External Debt and Political Instability'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=582