Donor Herding and Domestic Debt Crisis

Transcription

1 WP/06/09 Donor Hring an Domsic Db Crisis Yohan Khamfula, Monfor Mlachila, an Ephraim Chirwa

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3 2006 Inrnaional Monary Fun WP/06/09 IMF Working Papr Wsrn Hmisphr Dparmn Donor Hring an Domsic Db Crisis Prpar by Yohan Khamfula, Monfor Mlachila, an Ephraim Chirwa Auhoriz for isribuion by Davi O. Robinson April 2006 Absrac This Working Papr shoul no b rpor as rprsning h viws of h IMF. Th viws xprss in his Working Papr ar hos of h auhor(s) an o no ncssarily rprsn hos of h IMF or IMF policy. Working Paprs scrib rsarch in progrss by h auhor(s) an ar publish o lici commns an o furhr ba. This papr prsns a nw mol bas on h loan-pushing mol by Basu (99) o show how a omsic b crisis can occur in a low-incom counry following onor hring. Th mol focuss on h raional hring bhavior of onors u o payoff an informaion xrnaliis. Alhough hr ar many horical mols on hring bhavior, hs mols hav no formally consir h rlaionship bwn onor hring an omsic b crisis in a low-incom counry. This papr is an amp o fill his gap. Th papr shows ha u o onor hring bhavior a omsic b crisis can occur onc h acual b lvl is abov h sirabl on. JEL Classificaion Numbrs: E6, F3 Kywors: Donor hring bhavior; omsic b crisis; loan-pushing mol; omsic-b rpaymn gap; fiscal xpniur Auhor(s) Arss: yohan@sun.ac.za; mmlachila@imf.org; chirwa@yahoo.com Yohan Khamfula is a llnbosch Univrsiy, ouh Africa, an Ephraim Chirwa is a h Univrsiy of Malawi. An arlir vrsion of his papr is forhcoming in Appli Economics Lrs. Th auhors woul lik o hank, wihou implicaion, Robr Floo an Paul Cashin for simulaing iscussions an usful suggsions, as wll as Pr Fallon, Carlos Li, an Davi O. Robinson for commns an suggsions.

4 - 2 - Conns Pag I. Inroucion...3 II. Th Mol...3 A. Basic Mol Dails...4 B. Gnraing a Domsic Db Crisis...5 III. Conclusion...7 Rfrncs...8

5 - 3 - I. INTRODUCTION In his papr, w assum ha ai onors follow hring bhavior ha rmins ai flows in a low-incom counry (LIC). W moify a loan-pushing mol by Basu (99) o inrouc h onor hring bhavior ha may riggr omsic b crisis in a LIC. Accoring o Dvnow an Wlch (996), raional hring bhavior is usually mol for hr rasons: payoff xrnaliis, principal-agn problms, an informaion xrnaliis. Our mol focuss on raional hring bhavior of onors u o payoff an informaion xrnaliis. Alhough hr ar many horical mols on hring bhavior, hs mols hav no formally consir h rlaionship bwn onor hring an omsic b crisis in an LIC. This papr is an amp o fill his gap. Vivs (993) fins hring as bhavior whr on prson (or agn) obsrvs h acion(s) of hir prcssor(s), upas hir prior blif, an hn has mor incniv o imia hir prcssor(s) knowing ha hir choic may x pos no b opimal. Thus, agns ofn infr informaion ou of h acions of ohr agns. Th nncy o bas cisions largly on h obsrv cisions of ohr agns has bn mol as informaion xrnaliis. Banrj (992); an Bikhchanani, Hirshlifr, an Wlch (992) (hncforh BHW) inrouc h firs mols ha mphasiz h infficincis of hs informaion xrnaliis in a conx of social larning. Each on of hs mols consirs a populaion of agns now wih a priva, coslss an imprfc signal concrning h sirabiliy of a cours of acion. Chamly an Gal (994) consir a sup similar o h BHW mols, xcp ha all playrs hav h possibiliy o wai, in orr o obsrv how many playrs invs in h currn prio an o mak hir invsmn cision in h nx prio bas on suprior informaion. Thir analysis shows how ba oucoms an infficin waiing may occur in quilibrium. Th rs of h papr procs as follows. cion II prsns our mol. In cion III, w conclu by offring suggsions for mpirical analysis. II. THE MODEL In our moifi loan-pushing mol, ai onors bas hir sragis on wha hy s ohr ai onors oing, an hy, hmslvs, ar also sarching for xra informaion. As a rsul of sarching for his xra informaion, hr ar coss nsuing o onors. Th loan-pushing hory is furhr bas on h assumpion ha ai onors or lnrs ar supplying mor cri o h borrowing LIC han h lar woul volunarily ak a h prvailing inrs ra. 2 In pracic, h assumpion ha counris ar prsua o ak mor loans han hy ar willing o ak migh no b ralisic, as loans ar ypically givn wih coniionaliy, which may b (poliically) cosly o h borrowr. In crain cass, poliical conomy consiraions can b an imporan facor in conracing loans. For insanc, whn h numbr of (nw) loan- 2 Basu (99) obsrvs ha h inrs ra is no h only facor involv; b mauriy an faul provisions ar also imporan.

6 - 4 - financ projcs nrs posiivly in h voing funcion, in h shor rm poliicians coul b inclin o borrow byon wha coul b jusifi by conomic rurn. This aspc is no xplicily mol hr. W also xclu cass of onors acing purly for humaniarian rasons, for xampl, u o a naural isasr. A. Basic Mol Dails In our mol, h ai-rcipin counry announcs (L, i ), whr L is h amoun of loan ha h LIC wans o borrow, an i h inrs ra i is willing o pay in a givn prio,. Thus, in h mol, h borrowing LIC chooss an announcs (L, i ) so as o maximiz uiliy. Assum furhr ha ach lnr supplis ihr on uni of cri or nohing. L E b h xpc xcss supply of cri, an r j h lows ra a which h lnr j is willing o ln o h borrowr. I is assum ha r j is invrsly rla o xpc xcss supply, E : r j = r j ( E ). () W assum ha h oal supply of loans in prio,, o h LIC is rmin as: = ( E, i ) (2) whr / E 0 an / i 0. Donors viw an xcss supply of loans as a posiiv sign. Thus, givn h -funcion in quaion (2), ai onors rgar h currn-prio xcss supply of loans, E, as h sign of h LIC s criworhinss. Th lnrs (ai onors) hn supply h amoun of loans or cri on raional xpcaions, whr is h xpcaions suprscrip rlaiv o h informaion s hl in prio -: = ( Y L, i ) (3) whr Y is h xpc supply of funs in h currn prio; L h man for cri in h currn prio; an i h inrs ra h ai rcipin or borrowr is willing o pay in prio. Ai onors will n up supplying Y unis of cri only if his amoun saisfis quaion (3). Th lnr s xpc rurn, ρ, in prio is givn as: ρ = ( i π θ γ λ) (4) is now a funcion of h xpc supply of funs, Y, an h lnr s xpc rurn, (i - π θ - γ λ). π is h faul paramr for h borrowing LIC an i lis bwn 0 an. Juging from pas prformanc of a LIC in rms of loan rpaymn, h onor communiy is assum o hol som prior knowlg of h lnr s propnsiy o faul. Th closr his

7 - 5 - paramr is o 0 for a givn valu of θ, h highr will b h lnr s xpc rurn. θ is a givn consan. Thus, π θ is h valu of h faul coss of h b o h lnr or onor. Th paramr γ in h lnr s xpc rurn, (i - π θ - γ λ), rprsns cos of acquisiion of informaion o h lnr an i also lis bwn 0 an. As mnion abov, apar from obsrving wha hir prs ar oing, onors also sk informaion abou h LIC on hir own. Thr is, howvr, a cos aach o acquiring his xra informaion. I shoul b no ha a lowr valu of γ will imply a highr xpc rurn o h lnr. Th symbol λ sans for som givn consan. W rwri h -funcion, which assums raional xpcaions, as follows: = ( Y L,(i - π θ - γ λ) ) (5) In h loan-pushing mol, h supply of loans in prio,, pns posiivly on xpc supply in prio, Y, an lnr s xpc rurn in prio, ρ = ( i π θ γ λ). Th supply of nw loans can b xprss as follows: + 0, if ( i = + ( Y + + π L + + θ γ,( i + + λ) π + < ρ ory θ γ + + < Y λ) ) if ( i + π + θ γ + λ) ρ an Y + Y (6) In quaion (6), Y is h hrshol lvl of h supply of funs an ρ is h hrshol lvl of h lnr s rurn. If h xpc supply in prio, Y, an h lnr s xpc rurn in prio, (i - π θ - γ λ), xc hir hrshol lvls, Y an ρ rspcivly, h LIC rcivs forign loans or ai. Ohrwis, hr is no supply of nw loans. This mans ha h supply funcion bcoms isconinuous a h hrshol lvls. Howvr, h mol prsns an xrm cas of hring bhavior, sinc a small cras in h lnr s rurn will caus a rop in h supply of loans o zro. 3 Th srngh of h mol is ha h isconinuiy an h rvrsal of ai flows ar xplain nognously, vn hough h nir primiiv bhavioral funcions quaions () an (2) in h mol ar coninuous. B. Gnraing a Domsic Db Crisis W nx show how a omsic b crisis occurs in h vn of n-succssiv-prio simulanous wihrawals of ai by ai-onors from h borrowing LIC. uppos ha, as a rsul of ihr ba govrnanc an corrupion or poor macroconomic managmn, in 3 This is a cornr soluion. In pracic, hr may b a minimum lvl of onor inflows, for xampl, in h form of humaniarian ai. Howvr, h rsuls obain in his cas woul no b qualiaivly iffrn from wha follows in h rs of h papr.

8 - 6 - prio, ai onors announc hir innion o wihraw financial assisanc o h LIC wih ffc from prio + unil favorabl coniions prvail in h counry. If his siuaion las h govrnmn o borrow from omsic criors (ohr han ajusing is xpniurs, for xampl, in h xpcaion of a rvrsal of onors cision), w can nvisag a ris in ral inrs ras in vry prio afr +. W can formaliz his scnario as follows. Consir a squnc of T-zro ai flows o h LIC, whr T is h numbr of prios for which h LIC os no hav ai inflows following onor hring. Thus, from prio + up o prio T, hr is no supply of nw loans, namly +, +2,, +T. From quaion (6) abov, w can s ha saring from prio + h coniion ha ( i π θ γ λ) < ρ or Y < Y mus hol o saisfy h oucom. As a rsul of nsuing high ral inrs ras on h omsic financial mark, h govrnmn will sar o faul on omsic b as long as accumula b in ach prio is abov som hrshol lvl. In ach prio, w hav hr likly oucoms: 0, if ψ + k qualsϖ + k ψ + k ϖ + k = Ngaiv valu, if ψ + k is blowϖ + k (7) Posiiv valu, if ψ + k is abovϖ + k whr ψ + k is h acual omsic b accumula in prio +k (k =, 2,,T) an ϖ +k is h lvl of accumula omsic b ha h govrnmn is abl o rpay in vry prio. I is assum ha h acual omsic b accumula ( ψ ) is rmin as follows: + k ψ +k = f( ri + k, (D +k x ri + k ) 2 ) (8) whr ri + k is h ral inrs ra prvailing on h omsic financial mark; D +k is h ummy variabl which aks h valu of if hr is no supply of forign ai in prio +k an 0 ohrwis; an (D +k x ri + k ) 2 is h squar of h inracion variabl bwn D +k an ri + k. In quaion (7), h acual omsic b accumula in prio +k, ψ + k, is a sricly incrasing funcion of h squar of h inracion variabl, (D +k x ri + k ) 2 ; ha is, ψ + k / ( D+ k xri+ k ) > 0, givn ha D +k =. On h ohr han, if D +k = 0, ψ + k is a crasing funcion of ri + ; ha is, ψ / ri 0. k + k + k From quaion (7), w can s ha as long as ψ + k is qual o or lss han ϖ + k, a b crisis os no occur in h LIC. A b crisis occurs onc ψ + k is grar han ϖ +k. Th firs wo oucoms will obain if h govrnmn of h LIC rspons o onor hring by simulanously rucing is xpniurs an borrowing a wll-calcula sum of loans from h hom financial mark. If no rucion o fiscal xpniurs is ma, hn h hir oucom (omsic b crisis) is likly o b fac by h LIC.

9 - 7 - III. CONCLUION Bas on h analysis prsn abov, h main mpirical rsarch qusion ha ariss, hrfor, is whhr h changs in omsic b socks ar link o sun shifs in xrnal ai inflows, xacrba by onor hring. ubsqun mpirical work will n o sablish whhr hr has bn onor hring; ha is, whhr changs in h flows of assisanc by on onor hav bn havily influnc by on or mor ohr onors. Concrly, his coul b on, for xampl, by rmining whhr h growh ra of omsic b byon a crain hrshol is xplain by a clin in onor ai blow a crain hrshol, afr conrolling for a numbr of macroconomic nvironmn variabls. Empirical work woul also n o rmin why, whn fac wih imminn or acual cus in onor assisanc, h govrnmn i no cu xpniur or rais rvnus. 4 Finally, h mpirical analysis coul also usfully assss h consquncs of h bhavior of h govrnmn for omsic conomic oucoms. A major challng of h mpirical work will b o gahr h aa on iniviual onor financing commimns an isbursmns wih sufficin frquncy (monhly or quarrly), an ovr a sufficinly long prio. Fining aqua omsic b aa on socks an flows by yp an holr, whil asir, is no a rivial xrcis as mos LICs o no hav goo omsic b aa byon banking sysm cri, an on rasury bills an bons. 4 A possibl rason coul b ha h LIC govrnmn blivs ha onors will b fac wih h Goo amarian s ilmma, an no walk away for a prolong prio.

10 - 8 - REFERENCE Banrj, A., 992, A impl Mol of Hr Bhavior, Th Quarrly Journal of Economics, Vol. 57, No. 3, pp Basu, K., 99, Analyical Dvlopmn Economics (Cambrig: MIT Prss). Bikhchanani,., D. Hirshlifr, an I. Wlch, 992, A Thory of Fas, Fashion, Cusom, an Culural Chang as Informaional Cascas, Journal of Poliical Economy, Vol. 00, No. 5, pp Chamly, C. an D. Gal, 994, Informaion Rvlaion an ragic Dlay in a Mol of Invsmn, Economrica, Vol. 62, No. 5, pp Dvnow, A. an I. Wlch, 996, Raional Hring in Financial Economics, Europan Economic Rviw, Vol. 40. Vivs, X., 993, How Fas o Raional Agns Larn? Rviw of Economic uis, Vol. 60, No. 2, pp