International Debt and the Price of Domestic Assets

Author/Editor:

Roberto Garcia-Saltos ; Leonardo Auernheimer

Publication Date:

October 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 00/177

Subject:

English

Publication Date:

October 1, 2000

ISBN/ISSN:

9781451858860/1018-5941

Stock No:

WPIEA1772000

Format:

Paper

Pages:

29

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