International Debt and the Price of Domestic Assets
October 1, 2000
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Summary
This paper examines the behavior of indebtedness, consumption, and asset prices in a small open economy in which the foreign real interest rate depends not only on an exogenous world interest rate and on indebtedness, but also on the value of the capital stock, viewed as an implicit “collateral,” and hence on the price of capital. The paper finds that the collateral effect magnifies the intensity of shocks to the economy and the duration of their impact. The collateral effect also generates additional distortions that could lead to overborrowing. The paper discusses the policy responses to these distortions.
Subject: Asset prices, Collateral, Consumption, Debt burden, External debt, Financial institutions, National accounts, Prices, Revenue administration, Tax arrears management
Keywords: asset price arbitrage condition, Asset Prices, asset-price distortion, Collateral, Consumption, Debt burden, distortion issue, equilibrium interest rate, Financial Accelerator, interest rate decrease, International Debt, physical capital, price externality, price of capital, Tax arrears management, world interest rate, WP
Pages:
29
Volume:
2000
DOI:
Issue:
177
Series:
Working Paper No. 2000/177
Stock No:
WPIEA1772000
ISBN:
9781451858860
ISSN:
1018-5941
