Donor Herding and Domestic Debt Crisis
IMF Working Papers, April 1, 2006
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- Donor Herding and Domestic Debt Crisis
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Bibliographic details
- Authors: Ephraim W. Chirwa, Montfort Mlachila, Yohane Anthony Khamfula
- Published: April 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863697.001
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.
- The paper fills a gap in the literature by formally considering the relationship between donor herding and domestic debt crisis in a low-income country.
- 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.
Model and Mechanism
- Builds on the loan-pushing model by Basu (1991).
- Emphasizes rational herding behavior of donors driven by:
- payoff externalities, and
- information externalities.
Key Findings
- Donor herding behavior can precipitate a domestic debt crisis in a low-income country.
- A domestic debt crisis may occur once the actual debt level is above the desirable debt level (phrase preserved as in the source).
Subject and Keywords
- Subject: Debt default, Domestic debt, Financial crises, Loans, Real interest rates
- Keywords: expected return, real interest rate, WP