Donor Herding and Domestic Debt Crisis

By Ephraim W. Chirwa, Montfort Mlachila, Yohane Anthony Khamfula

April 1, 2006

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Ephraim W. Chirwa, Montfort Mlachila, and Yohane Anthony Khamfula. Donor Herding and Domestic Debt Crisis, (USA: International Monetary Fund, 2006) accessed November 9, 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 presents a new model based on the loan-pushing model by Basu (1991) to show how a domestic debt crisis can occur in a low-income country following donor herding. The model focuses on the rational herding behavior of donors due to payoff and information externalities. Although there are many theoretical models on herding behavior, these models have not formally considered the relationship between donor herding and domestic debt crisis in a low-income country. This paper is an attempt to fill this gap. The paper shows that due to donor herding behavior a domestic debt crisis can occur once the actual debt level is above the desirable one.

Subject: Debt default, Domestic debt, Financial crises, Loans, Real interest rates

Keywords: Expected return, Real interest rate, WP

Publication Details

Pages:

10
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/109
Stock No:

WPIEA2006109
ISBN:

9781451863697
ISSN:

1018-5941

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