Thesis (Ph. D.)--University of Chicago, 1994. / Includes bibliographical references (leaves 148-152).

This dissertation looks at how African countries can mitigate the effects of external debt burden. African countries are enmeshed in unsustainable external debts that have led to debt overhang problems, declining output, escalating current account deficits and worsening human welfare indicators. These external debt burdens are further worsened by the structural weaknesses of these economies. The World Bank and the International Monetary Fund have initiated strategies aimed at trying to arrest the escalating debt burden such as rescheduling, structural adjustment programs and the highly indebted poor countries initiative. However, African countries continue to experience difficulties in servicing external debts. The objective of this study is to find ways by which African countries can effectively manage their debt burden and possibly come up with self pre-qualification schemes that would forestall future external debt problems. The questions the study seeks to answer are: how can African countries effectively manage their current debt burden? What can African countries do to forestall the pervasive external debt accumulation in the future? To address these questions, I develop a dynamic stochastic general equilibrium model of external debt burden for Africa. The model is estimated using the maximum likelihood method by applying the Kalman filter to the state space representation of the model. Empirical results of the model suggest that African countries need to refine their basket of imports and mainly import inputs that can be used in the production sector as opposed to importing consumption goods. Most importantly, these countries must re-think their export products and markets, and perhaps endeavor to export final goods as opposed to exporting primary commodities. Furthermore, simulations of the model show that an expansionary monetary shock and a favourable world commodity price shock leads to an increase in external debt. On the other hand, the world interest rate shock leads to a fall in external debt. An interesting result worth highlighting is that a favourable commodity price shock leads to an increase in imported investments but the increase in imported investments does not translate into increased output. On the other hand, an unfavourable world interest rate shock leads to a fall in imported investments. Generally, these findings suggest that African countries are vulnerable to external shocks. In pursuit of the second objective – possible ways of sourcing external debt and managing it sustainably – I find that the appropriate threshold level for debt sustainability is a ratio of external debt to gross domestic product of between 40%-60% for Africa compared to 120%-150% for Latin America. Surprisingly, East Asia has the lowest significant debt sustainability threshold of the three emerging market regions. On liquidity, which is captured by the short-term debt to reserves ratio, the threshold is 60%-80% for all the three regions. On governance, a stable political environment plays a crucial role in determining the external debt burden of African countries. An improvement in the legal system and a stable political environment leads to an increase in exports and a fall in consumption imports. These in turn reduce foreign debt. These findings suggest that African countries must pursue proper governance practices if they are to appropriately and effectively manage their external debt in ways that enhance economic progress instead of economic retardation.

The object of this thesis is the analysis of the external debt of countries which are members of the G-8. The external debt is researched through individual sectors of economy. Also there are described debt instruments and all the factors which can influence the external debt. The last part of this thesis analyses situation and development of individual debt instruments and the impact on total external debt.

Thesis (Ph. D.)--University of Maryland, 1993. / Includes bibliographical references (leaves 253-265).

In this dissertation, I study international financial crises. For this purpose, I build two models. In the first model, I focus on financial crises in developing, large open economies where foreign debt with various maturities and issue dates is available. The objective is to measure the vulnerability of the domestic financial system to domestically triggered bank runs and externally triggered sudden stops. The main contribution of this model is that both types of crises are treated as rational responses of domestic depositors and international creditors. Such vulnerability measures are linked to fundamentals and equilibrium term structure of foreign debt. Banks’ vulnerability to runs increases if they hold a relatively shorter term debt. Also, a larger cost of liquidating the long-term investment before maturity makes the banks more fragile. In the next step, given a domestic banking crisis, I allow international creditors to decide whether they want to stop lending to domestic banks (in which case a “sudden stop” takes place) or not. A sudden stop is more likely if (i) creditors highly discount future consumption, (ii) creditors’ current income is small relative to their future income, and (iii) the cost of liquidating the long-term investment before maturity is small. In the second model, I investigate the merits of alternative monetary policies with respect to financial fragility. In this monetary model of an explicit financial system, I motivate the demand for two fiat currencies by spatial separation and limited communication of agents. There is a domestic and a foreign currency freely traded without restrictions. I analyze the policy of a constant growth rate of domestic money supply with a floating exchange rate regime. Both currencies are held in positive amounts at the steady-state only if the growth rate of domestic money supply is equal to the world inflation rate (WIR). If the former rate is larger than the WIR, domestic currency is not held at the steady-state. Also, total real money balances held is negatively related with WIR. Finally, monetary policy in the form of a constant growth rate of domestic money supply is neutral with respect to welfare.

In this dissertation, I study international financial crises. For this purpose, I build two models. In the first model, I focus on financial crises in developing, large open economies where foreign debt with various maturities and issue dates is available. The objective is to measure the vulnerability of the domestic financial system to domestically triggered bank runs and externally triggered sudden stops. The main contribution of this model is that both types of crises are treated as rational responses of domestic depositors and international creditors. Such vulnerability measures are linked to fundamentals and equilibrium term structure of foreign debt. Banks’ vulnerability to runs increases if they hold a relatively shorter term debt. Also, a larger cost of liquidating the long-term investment before maturity makes the banks more fragile. In the next step, given a domestic banking crisis, I allow international creditors to decide whether they want to stop lending to domestic banks (in which case a “sudden stop” takes place) or not. A sudden stop is more likely if (i) creditors highly discount future consumption, (ii) creditors’ current income is small relative to their future income, and (iii) the cost of liquidating the long-term investment before maturity is small. In the second model, I investigate the merits of alternative monetary policies with respect to financial fragility. In this monetary model of an explicit financial system, I motivate the demand for two fiat currencies by spatial separation and limited communication of agents. There is a domestic and a foreign currency freely traded without restrictions. I analyze the policy of a constant growth rate of domestic money supply with a floating exchange rate regime. Both currencies are held in positive amounts at the steady-state only if the growth rate of domestic money supply is equal to the world inflation rate (WIR). If the former rate is larger than the WIR, domestic currency is not held at the steady-state. Also, total real money balances held is negatively related with WIR. Finally, monetary policy in the form of a constant growth rate of domestic money supply is neutral with respect to welfare.

The impact of external debt on economic growth is a debatable issue between scholars since the onset of the debt crisis in 1980’s. This thesis examines whether external debt affects the economic growth of selected heavily indebted poor African countries through the debt overhang and debt crowding out effect. This is carried out by using data for eight heavily indebted poor African countries between 1991 to 2010.The result from estimation shows that external debt affects economic growth by the debt crowding out effect rather than debt overhang. Moreover, in an attempt to mark out debt servicing history, the thesis found the selected countries are not paying (servicing) more than 95% of their accumulated debt.

This dissertation consists of three chapters and is centered on the issues of external debt default and growth. In the first chapter, we develop a macrodynamic model of a small open economy that incorporates the effects of haircut and external debt default on the borrowing cost of a debtor country. We argue that the ability to impose a substantial haircut, a reduction in external debt in the face of a sovereign default can work as a strong enough incentive for a debtor country to borrow heavily even when it faces an increased default risk. Calibrating our model to real world data and employing numerical simulations we show that the observed overborrowing and consequently multiple external debt defaults by many countries around the world are equilibrium outcomes in the presence of the haircut induced benefit of sovereign default. Chapter two empirically investigates how debt default affects growth in low-income countries that have a high debt burden. We adopt Rose’s (2005) methodology of using dummy variables to examine both the contemporaneous and lagged effects of debt default on growth in countries that received debt relief assistance under the Heavily Indebted Poor Countries Initiative (HIPC). An inflow of capital is expected to affect these economies differently than other countries which are not eligible for the HIPC initiative. Our findings indicate that initiation of an external debt default leads to a downturn in growth, possibly due to the uncertainty created by such an event. However, debt renegotiation marking the conclusion of a default spell helps to revive growth and contributes to about 1 percentage point increase in growth for these countries. This positive growth effect of successful completion of a default episode is robust to different specifications and is pertinent even in the long run. In the third chapter, we examine the differential impacts of debt renegotiation on the various sectors within an economy. We analyze more than fifty years of data for ten broadly defined sectors from twenty-four mostly developing countries around the world. Our results indicate that debt rescheduling is associated with five to nine percent growth in sectoral productivity in countries outside of sub-Saharan Africa. This positive impact of debt renegotiation is particularly significant in the sectors of mining, construction, trade services, transport services, business services and personal services. Our findings provide support to the postulations of the debt overhang theory and the crowding out theory at sectoral level.

No description available.

The external debt is no doubt "a front burner" nowadays, not only in the group of well informed economists or politicians. And although it is regarded as a problem ascribed to the third world countries only, any national economy can bear it. Anyway, neither developed countries are exceptions, despite distinctly small attention which is given to them from the external indebtedness point of view. In my thesis, I decided to link the foreign debt problem with another frequent topic of any discussions: with the really prudent process of the European Union expansion to the East. Primarily, I will try to confute many skewed information about both of them. Or - is the foreign debt really such an uncompromising indicator of the external instability hindering any economic progress? Must thus the relatively successful transformation of the transitive economies pass off with the zero foreign indebtedness entirely?