Rainer Haselmann

• In this paper we develop a simple neoclassical growth model with perfect international capital mobility to analyze the international debt dynamics of developing countries in general and Korea, Malaysia and Thailand in particular. We show that three different regimes can be distinguished: a stable steady state debtor regime, a stable steady state creditor regime and an unstable regime. A switch from a stable debtor or a stable creditor position to an unstable creditor regime may be a sign of forthcoming trouble. We iestigate this issue empirically for the three Asian countries in the run-up to the 1997 Asia crisis, using data over the period 1975-2000. Over the full sample, the evidence suggests that debt dynamics evolved according to the stable debtor case in each country. Using a rolling regression technique, we find that indeed occasional switches to the unstable regime occurred. More in particular, we demonstrate that all three countries iestigated here were facing deteriorating domestic fundamentals - reflected in potentially unstable debt dynamics - prior to the breakout of the Asia crisis. As such, our approach appears to offer an interesting early warning indicator for financial (debt) crises.