International Debt and the Price of Domestic Assets

By Roberto Garcia-Saltos, Leonardo Auernheimer

October 1, 2000

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Roberto Garcia-Saltos, and Leonardo Auernheimer. International Debt and the Price of Domestic Assets, (USA: International Monetary Fund, 2000) accessed September 18, 2024

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.

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

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/177
Stock No:

WPIEA1772000
ISBN:

9781451858860
ISSN:

1018-5941

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