DP2520 Debt Maturity and the Global Financial Architecture

Author(s): Olivier Jeanne
Publication Date: August 2000
Keyword(s): Capital Controls, Debt Maturity, International Debt, Lending In Last Resort, Liquidity Crises
JEL(s): F32, F33, F34
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2520

The paper starts from the premise that the debate on the ?new architecture? of the international financial system should be based on a theory that endogenizes the structure of countries' external liabilities. I present a model in which the maturity of a country's external sovereign debt is the solution to an incentives problem, which may lead to reliance on short-term debt and vulnerability to runs. I study, in the context of this model, the welfare effects of an international lender of last resort, measures aimed at coordinating creditors in crises, and a tax on short-term capital flows. These measures may increase or decrease global welfare, and always leave it strictly below the first-best level.