Rainer Haselmann

• n 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 Brazil and Argentina 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 Brazil and Argentina over the period 1960-1999. Over the full sample, the evidence suggests that debt dynamics evolved according to the stable debtor case in both countries. Using a rolling regression technique, we find that indeed occasional switches to the unstable regime occurred. In particular, Argentina was in the unstable regime for most of the 1990s way before the Argentine debt crisis erupted.