External Debt Evolution When Global Financial Markets Are Incomplete

  • Alexis Anagnostopoulos
  • Gregorios D. Siourounis
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)


This chapter studies the evidence that international financial markets’ incompleteness is an important feature that can explain the evolution of a country’s external debt and output growth in the presence of productivity shocks. Recent financial turmoil in the heart of Europe, the Eurozone, shows a great need to understand how financial linkages between countries behave in the presence of adverse shocks as well as the extent of policy intervention needed. In order to address that, we use a two-country general equilibrium model that allows interaction between the financial markets of the two countries. We then characterize the response process of net foreign assets accumulation or external debt1 and output growth under both complete and incomplete markets and use this analysis as a road map to test empirically the behavior of these variables in a panel of 60 countries. We show that the behavior of external debt and output growth can be rationalized by the incomplete markets model.


Unit Root Unit Root Test Output Growth Foreign Asset Incomplete Market 
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© Alexis Anagnostopoulos and Gregorios D. Siourounis 2015

Authors and Affiliations

  • Alexis Anagnostopoulos
  • Gregorios D. Siourounis

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