Econ 161-Lecture 13

Econ 161-Lecture 13 - GlobalIntegrationofLatinAmerica...

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Unformatted text preview: GlobalIntegrationofLatinAmerica Lecture13 c Marc-AndreasMuendler UniversityofCalifornia,SanDiego May17,2011 13.InternationalCapitalFlowsandSovereignRisk Econ161, c M.Muendler TheCapital-FlowParadox Capital-poordevelopingcountriescountriesofferrelativelyhighre- turnstocapitalsothatcapital-richdevelopedcountriesshouldinvest intheSouth Inthesecondhalfofthe20thcentury,however,netcapitalflows paradoxicallyflowedtotheNorth(Lucas1990) Hypothesis :Physicalcapitaltraceshumancapitalendowments Alternativehypothesis :Credit-marketimperfectionsandpoliticalrisk mayexplainthedirectionoftheflows(Rogoff2004) 13.InternationalCapitalFlowsandSovereignRisk Econ161, c M.Muendler SovereignDefaultRisk Default :Suspensionofdebtpayments(principalorinterest). Debtcontractscannotbeenforcedacrossbordersintheabsenceof asupranationalauthority SovereignDefaultRisk :Sovereigncountriescandefaultattheirdis- cretion. Possiblesanctionstoadefaultingcountryarelimitedandindirect Sovereignriskhinderstheoperationofinternationalcapitalmarkets, dampeninggainsfromintertemporaltradeandportfoliodiversification 13.InternationalCapitalFlowsandSovereignRisk Econ161, c M.Muendler SovereigntyandSovereignImmunity Sovereignty . Sovereigntymeanssupremepower.Theconceptofsovereignty,a conceptofinternationallaw,iscloselyrelatedtotheindependenceofthestate LimitedSovereignty . Theconceptofunlimitedsovereigntydidnotlastlong afteritsadoptioninthe19thcentury.Indomesticmatters,democracyimposes limitationsonthepowerofthesovereign.Internationally,theinterdependenceof statesrestrictstheprinciplethatmightisright.Peacedependsoninternationallaw, andtherecanbenolawwithoutlimitationsonsovereignty.(HagueConferences 1899and1907;Briand-KelloggPact1928;UNCharter) SovereignImmunity . Exemptionorfreedomfromliabilityofthesovereign. 13.InternationalCapitalFlowsandSovereignRisk Econ161, c M.Muendler InternationalLendingandDefaultRisk Domesticdefaultriskexistsbecauseborrowersmaybecomeunable torepayunderunfavorableeconomicconditions Sovereigndefaultriskismoresevere:Countriesmaybeablebutnot willingtorepay Creditisviableifcontractsareenforceableorself-enforcing Sanctionsoninternationalborrowersarelimited.So,thevolumeand efficiencyofinternationallendingarecurtailed 13.InternationalCapitalFlowsandSovereignRisk Econ161, c M.Muendler IncentivesforSovereignDefault ForeignDebtContract Principal: CA today (currentaccountdeficitforborrower,surplusforlender) Repayment:- CA tomorrow =(1+ r * ) CA today , repaymentofprincipalandinterest (currentaccountsurplusofborrower,deficitforlender) Borrowercanrefusetorepaytomorrowdespitesufficientinvestment. Borrowercanuseforeigncreditmostlyforcurrentconsumptionand refusetoinvest,provokingdefaulttomorrow (domesticconsumersfirst) 13.InternationalCapitalFlowsandSovereignRisk Econ161, c M.Muendler LackingWillingnessToRepay Consumption and IncomeToday (MEX) C o n s u m p t io n a n d In c o m e T o m o r r o w (M E X ) C , Y tomorrow tomorrow C ,Y today today 13.InternationalCapitalFlowsandSovereignRisk13....
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This note was uploaded on 08/14/2011 for the course ECON 161 taught by Professor Muendler during the Spring '11 term at San Diego.

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Econ 161-Lecture 13 - GlobalIntegrationofLatinAmerica...

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