International and Domestic Collateral Constraints

This paper presents a macroeconomic model to investigate how the presence of, and changes in, international and domestic collateral constraints affect key macroeconomic variables like interest rate, consumption, and output. The model is concise but is close to the standard macroeconomic model, and the limited commitment problem in it is partially endogenous. The analysis of its steady state equilibrium successfully explains how lack of international and domestic collateral gives a rise to many important macroeconomic issues such as a foreign bond premium, insufficient consumption smoothing, and inefficiency in production. This paper also provides intuition for the role of development banks that enhance international debt financing.