the notes on international financelec11

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1、Lecturenotes:160Brevised12/03/02Lecture11:DevelopingCountryIssues(chapter22)Topics:MacroeconomicfeaturesDebtanddebtcrisisMexicanpesocrisisCurrencyboardsanddollarizationAsiancrisisEasternEuropeIntro:Theissueswehavediscussedsofarhaveallrelatedtothedeveloped

2、countriesintheworld.Butmanyofthedramaticdevelopmentsintheinternationalmacroeconomyinrecentdecadeshavetakenplaceinthedevelopingcountries.Webeginbycharacterizinghowthemacro-economiesinthesecountriestypicallyaredifferentfromthoseintheUSorotherdevelopedcountr

3、ies.Thenweconsidervariouscrisesthathaveoccurredindevelopingcountries.1)Macroeconomicfeatures:a)Undevelopedfinancialmarkets:UsuallydevelopingcountriesdonothavethebroadandrapidlyadjustingfinancialmarketsthatexistintheU.S.Stockmarketsusuallyareverysmallifthe

4、yexistatall,andtherearenotmarketsforlong-termdebtcontracts.Thislimitstheoptionsforfirmswhowishtoborrow,saytocarryoutinvestmentprojects.Thereisbanklending,butthisistightlycontrolledbythegovernment.Oftenbylawkeepsinterestratesartificiallylow,soastosubsidize

5、favoredindustriesorsectorsintheeconomy.Lowinterestratesmeanthereisashortageofsavingandexcessdemandforborrowing,sogovernmentallocatescapitaltothepreferredsectors.ThereisoftenCapitalflight:flowofprivatefundsintoforeignassets,becauselowinterestratesathomeorf

6、earfinancialinstabilitylikecurrencycrises.b)Government’spervasiveroleStateenterprises:Manycompaniesareownedandmanagedbythenationalgovernment.InBrazil,halfofGNPisproducedbystatecompanies.Recentlyhasbeentrendofsomeprivatizationinsomedevelopingcountries.Priv

7、atization:governmentsellstate-ownedenterprisestoprivatesectororforeigninvestors,eithertohelpefficiencyortogenerategovernmentrevenue.1c)Seigniorage-inflationtax:Withundevelopedfinancialmarkets,itishardforgovernmenttopayforadeficitbysellingitsbonds.Onealter

8、nativeistoborrowfromforeignbanksorsellbondsabroad.Anotheralternativeistoprintthemoneyitneeds,sinceitcontrolsthemoneyprintingpresses.Def:Seigniorage:therealoutputthatagovernmentobtainsbyprintingmoneyandspendingit.Cle