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Title: Credit markets and international capital
Author: Biggs, M.
Awarding Body: University of Cambridge
Current Institution: University of Cambridge
Date of Award: 2002
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The first essay examines the problem of adverse selection when borrowers have private information about uncertain investment opportunities and are afforded the protection of limited liability. In particular, it considers how screening devices such as leverage ratios and interest rates can be used to assist in the transfer of information from borrowers to lenders. Both the supply and demand for credit is modelled. In a partial equilibrium setting, an increase in leverage ratios can enhance investment quality in a closed economy. If a country chooses to liberalise its capital account, an inflow of foreign capital can lead to a fall in GNP unless leverage ratios increase. In the second essay, the model is extended to include the risk of leverage into the investment decision. Again, multiple equilibria arise. In a close economy, the leverage ratio that maximises interest rates is higher than the leverage ratio that maximises output. In addition, the economy tends towards a Rothschild Stiglitz equilibrium that maximises nether interest rates nor output. This provides a justification for government intervention. In an open economy, the interests of government, savers and borrowers are aligned. However, liberalising the capital account does not ensure an increase in GNP. Opening the capital account gives the domestic economy access to foreign capital, but it loses control over the risk free interest rate. If capital flows are small, the costs of the latter may exceed the benefits of the former. In the third essay, empirical support for the theoretical insights of the first two essays is obtained. An hypotheses gleaned from the first two papers is that foreign capital should be less effectively allocated by the domestic banking sector, and consequently capital inflows should be associated with a fall in total factor productivity growth. Using a variety of methods, evidence is found to support this claim.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available