North-South Lending and Endogenous Domestic Capital Market Inefficiencies


Gertler, Mark, and Kenneth Rogoff. 1990. “North-South Lending and Endogenous Domestic Capital Market Inefficiencies.” Journal of Monetary Economics 26: 245-266.
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We develop an open-economy of intertemporal trade under asymmetric information. Capital market imperfections are endogenous and depend on a county's stage of economic development. Relative to the perfect-information benchmark, North-South capital flows are dampened (and possibly reversed) and world interest rates are lower. Whereas riskless rates are equalized across borders, the domestic loan rate is higher in poorer countries. The model can be applied to a number of policy issues including the debt-overhang problem, the indexation of foreign public debts, and the effect of income on distribution growth.


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