Martins-da-Rocha, V. F. and Vailakis, Y. (2017) On the sovereign debt paradox. Economic Theory, 64(4), pp. 825-846. (doi: 10.1007/s00199-016-0971-6)
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Abstract
Bulow and Rogo (1989) show that lending to small countries cannot be supported merely on the country's \reputation for repayment" if exclusion from future credit markets is the only consequence of default. Their arguments are valid under fairly general conditions but they do not go through when the output of the sovereign may vanish along a path of successive low productivity shocks, or when it may grow unboundedly along a path of successive high productivity shocks. We propose an alternative proof illustrating that their renowned sovereign debt paradox holds in full generality.
Item Type: | Articles |
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Additional Information: | Financial support from CNPq is gratefully acknowledged by V. Filipe Martins-da-Rocha. Yiannis Vailakis acknowledges the financial support of an ERC starting grant (FP7, Ideas specific program, Project 240983 DCFM) and of two ANR research grants (Project Novo Tempus and Project FIRE). |
Keywords: | Sovereign risk, lack of commitment, reputation debt. |
Status: | Published |
Refereed: | Yes |
Glasgow Author(s) Enlighten ID: | Vailakis, Professor Yiannis |
Authors: | Martins-da-Rocha, V. F., and Vailakis, Y. |
College/School: | College of Social Sciences > Adam Smith Business School > Economics |
Journal Name: | Economic Theory |
Publisher: | Springer |
ISSN: | 0938-2259 |
ISSN (Online): | 1432-0479 |
Published Online: | 30 April 2016 |
Copyright Holders: | Copyright © 2016 Springer-Verlag Berlin Heidelberg |
First Published: | First published in Economic Theory 64(4):825-846 |
Publisher Policy: | Reproduced in accordance with the copyright policy of the publisher |
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