Foreign debt supply in an imperfect international capital market: Theory and evidence |
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Authors: | Keunsuk Chung Stephen J Turnovsky |
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Institution: | 1. School of Business Administration, Pennsylvania State University, Harrisburg, Middletown, PA 17057, USA;2. Department of Economics, University of Washington, Seattle, WA 98195, USA |
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Abstract: | We investigate the determinants of foreign borrowing costs in a stochastically growing economy. We find that these increase with the debt-wealth ratio, depending also upon the volatilities of domestic and foreign origin, and the length of debt contract. In addition, the sensitivity of the short-term debt supply to the debt-wealth ratio exceeds that of long-term debt, and the effects of volatility on the borrowing premium, growth of wealth, and its volatility, depend on the relative size of a direct effect and a secondary portfolio-adjustment effect of the initial shock, as well as the length of the debt contract. Panel regressions suggest that the empirical evidence generally support the theoretical predictions. |
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Keywords: | F34 F43 O11 |
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