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Private Debt with Default Risk within and across Border

Author

Listed:
  • Gao, Xiang
Abstract
Following Jeske's (2006) decentralized international risk sharing arrangement where residents have access to international capital markets, this paper studies the presence of resident default risk on borrowing happened between domestic agents, in addition to default risk on private debt contracts across border. The paper shows that, without the assumption of perfect domestic contract enforcement, more international risk sharing and higher welfare can be supported. Moreover, the domestic interest rate equals to the highest marginal rate of substitution in countries that are participation constrained in international financial markets. This asset pricing result overturns the well established argument that interest rate should be the lowest to induce repayment in closed economy models with domestic credit crisis.

Suggested Citation

  • Gao, Xiang, 2009. "Private Debt with Default Risk within and across Border," MPRA Paper 17126, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17126
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Default risk; private debt; limited commitment;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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