Debt and Conditionality under Endogenous Terms of Trade Adjustment

The purpose of this study is to identify conditions under which renewed international. lending will benefit both the developed and the developing countries. Our analysis will evaluate how the presence of terms of trade adjust-rent and distorted credit markets affect the conditions for the existence of beneficial lending. We demonstrate that in the presence of endogenous terms of trade adjustment, there are cases in which a competitive international banking system may not revitalize lending for investment purposes, even if such renewed lending is socially desirable, Renewed lending may require the appropriate conditionality, and the presence of endogenous terms of trade adjustment puts greater weight on investment conditionality.

Strategic Investment in a Debt Bargaining Framework

This paper analyzes the strategic role of investment from a debtor country's perspective. The framework is one in which, if the debtor country is unable to meet debt obligations, a bargaining regime determines the amount of debt repayment. In the context of a two-country real trade model, debt repayment is equal to the trade surplus of the debtor. The outcome of the bargaining game will therefore be dependent (among other things) on the level of production in the debtor country. In this framework, the paper shows that productive investment may increase or decrease the bargaining power of the debtor country. This ambiguity appears to be fairly robust.

A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds

This article explores the behavior of emerging market mutual funds using a novel database covering the holdings of individual funds over the period January 1996 to December 2000. The degree of herding among funds is statistically significant, but moderate. Herding is more widespread among open-ended funds than among closed-end funds, but not more prevalent during crises than during tranquil times. We find some evidence that funds tend to follow momentum strategies, selling past losers and buying past winners. Copyright 2003, International Monetary Fund

A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds

This paper explores the behavior of emerging market mutual funds using anovel database covering the holdings of individual funds over the periodJanuary 1996 to March 1999. An examination of individual crises shows that,on average, funds withdrew money one month prior to the events. Thedegree of herding among funds is statistically significant, but moderate.Herding is more widespread among open-ended funds than among closed-endfunds, but not more prevalent during crises than during tranquil times.Funds tend to follow momentum strategies, selling past losers and buyingpast winners, but their overall behavior is more complex than oftensuggested

The Elusive Costs of Sovereign Defaults

Few would dispute that sovereign defaults entail significant economic costs, including, most notably, important output losses. However, most of the evidence supporting this conventional wisdom, based on annual observations, suffers from serious measurement and identification problems. To address these drawbacks, we examine the impact of default on growth by looking at quarterly data for emerging economies. We find that, contrary to what is typically assumed, output contractions precede defaults. Moreover, we find that the trough of the contraction coincides with the quarter of default, and that output starts to grow thereafter, indicating that default episode seems to mark the beginning of the economic recovery rather than a further decline. This suggests that, whatever negative effects a default may have on output, those effects result from anticipation of a default rather than the default itself

Public Investment in Infrastructure in Latin America: Is Debt the Culprit?

Panel data for seven Latin American countries are used to assess the influence of public indebtedness on public investment in infrastructure in the period 1987-2001. Debt increases are associated with higher public infrastructure investment, an effect that is robust to the inclusion of many other fiscal and macroeconomic variables. This paper also finds some evidence of complementarity between public and private investment and of the negative effect of IMF adjustment loans on infrastructure expenditures. No evidence is found that debt defaults affect public investment in infrastructure

Public Debt and Social Expenditure: Friends or Foes?

This paper assesses the effects of total public debt (external and domestic) on social expenditure worldwide and in Latin America using an unbalanced panel of around 50 countries for the period 1985-2003. The most robust and important finding is that higher debt ratios do reduce social expenditures, as popular opinion holds. This effect comes mostly from the stock of debt and not from debt service payments, indicating that debt displaces social expenditures not so much because it raises the debt burden, but because it reduces the room (or the appetite) for further indebtedness. Loans from multilateral organizations like the World Bank or the Inter-American Development Bank do not seem to ameliorate the adverse consequences of debt on social expenditures. In accordance with popular wisdom, our results indicate that defaulting on debt obligations does help to increase social expenditures. Nonetheless, Latin America is different in some respects. The adverse effects of debt and debt-interest payments are significantly stronger in the region, which makes defaults more beneficial to social expenditures. While many of these conclusions are very heterodox, their main policy implication is not; there is no better way to protect social expenditures than to avoid overindebtedness, especially in Latin America

Foreign Direct Investment: Good Cholesterol?

This paper studies the proposition that capital inflows tend to take the form of FDI--i. e. , the share of FDI in total liabilities tends to be higher--in countries that are safer, more promising and with better institutions and policies. It finds that this view is patently wrong since it stands the historical record on its head. It then uses alternative theories to make sense of the facts. It begins by studying the determinants of the size and composition of the flows of private capital across countries. It finds that while capital flows tend to go to countries that are safer and have better institutions and financial markets, the share of FDI in total flows is not an indication of good health. On the contrary, countries that are riskier, less financially developed and have weaker institutions tend to attract less capital but more of it in the form of FDI. Hence, interpreting the rising share of FDI as a sign of good health is unwarranted. This is even more so, given that FDI`s recent rise has taken place while total private capital inflows have fallen