This paper analyzes the determinants of developing country long-run creditworthiness, focusing on the process of capital accumulation relative to external debt. Creditworthiness depends on the actual capital stock compared with a critical level, representing the gross wealth just sufficient to ensure that interest payments to foreigners never exhaust national output given expected gross inflows and existing outstanding debt. Hence, the probability of rescheduling is linked to debt service-capital, net inflows-capital, investment rates, and income levels. The empirical results, based on a probit analysis of historical rescheduling incidents, are quite robust and supportive of the theoretical framework.

With dual exchange rates, where a managed official exchange rate co-exists with a floating black market rate, a given budget deficit may be consistent with many different inflation rates rather than two, which is the normal result in closed economy systems. Further, all these inflation equilibria are saddle-point stable. A policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high-inflation, saddle-point stable equilibrium where money inflation elasticity exceeds unity. The analytics are motivated and illustrated by the Bolivian hyperinflation of 1984–1985.