HICs' optimal trade openness and the modelling of the default penalty

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Abstract

Aizenman suggests that highly indebted countries' (HICs') credit market policies should aim at increasing the degree of trade openness, since in the social optimum openness is larger than in the competitive market outcome. In this paper I show that when it is costly for creditors to impose sanctions on a defaulting country, there is a penalty structure alternative to Aizenman's which will be preferred by creditors. Aizenman's results on debtor's optimal openness and credit market policies may then be reversed.

Original languageEnglish
Pages (from-to)803-811
Number of pages9
JournalJournal of International Money and Finance
Volume17
Issue number5
DOIs
Publication statusPublished - 1 Oct 1998

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Keywords

  • Credit market policies
  • Default penalties
  • G1
  • Trade openess

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