Effects of credit constraints in international borrowing: The case of Thailand

Wisate Pratoomsuwan, Fordham University

Abstract

The main objective of this dissertation is to study the distortions introduced by credit constraints in the optimal policies of a developing country borrower and to characterize the extent to which these constraints induce arrears as a substitute source of financing for a constrained borrower. It's divided into four parts.^ The first part studies the effects of credit limits on the borrower's decisions. A three-period model which captures the most salient features of current lending to developing countries is the vehicle used. It is shown that credit limits lead in most cases to an optimally chosen level of arrears, and distort the criteria the borrower used to allocate resources to competing alternatives. Besides the effects from current constraints on the debtor's decisions, there exist other distortions which operate through credit ratings and their relationship to future credit limits. By characterizing different patterns of current and future credit restrictions some observed features of lending in international markets can be explained.^ The second part uses the results obtained in the first part to characterize the responses of credit constrained borrowers to temporary and permanent external shocks. Credit constrained borrowers react in a manner which is fundamentally different from that of borrowers who do not face any credit limits. In particular, the widely accepted prescription of accommodating temporary shocks through increased borrowing, while carrying out immediate adjustment to permanent shocks is shown not to be optimal for all patterns of present and future availability of credit.^ In the third part, an expanded equilibrium model of stochastic growth is used. Lenders set credit limits based on the repayment ability of borrowers, which is a function of the debt and capital stocks, and the evolution of nature. The equilibria are characterized and seen to include the effect of the credit limits on the optimal policies. Inconsistency of the optimal policy, obtained elsewhere in the literature is replicated here and its relevance discussed.^ Finally, in the fourth part, utilized the data of Thailand to evaluate the model on the basis of economic, statistical, and econometric criteria. The evaluations are presented. ^

Subject Area

Finance

Recommended Citation

Pratoomsuwan, Wisate, "Effects of credit constraints in international borrowing: The case of Thailand" (1992). ETD Collection for Fordham University. AAI9215354.
https://fordham.bepress.com/dissertations/AAI9215354

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