Patrick Bolton and Xavier Freixas

Inter-American Development Bank, June 19, 2006


This paper analyzes the determinants of the composition of sovereign bond, corporate bond and bank financing in a general equilibrium model of the financial sector of an emerging market economy (EME). We model an EME as an economy with a shortage of capital, weak debt enforcement institutions and potential government overborrowing, which may expose the country to sovereign default risk. As in Bolton and Freixas (2005) we model banks as having a comparative advantage in restructuring debt of financially distressed firms, but their lending is constrained by capital adequacy requirements. Corporate bond financing is a less flexible form of financing but is unconstrained by any capital adequacy requirements.

View the paper hereFinancial Architecture in Emerging Market Economies