Borrowing in excess of natural ability to repay

Martins-da-Rocha, V. F. and Vailakis, Y. (2017) Borrowing in excess of natural ability to repay. Review of Economic Dynamics, 23, pp. 42-59. (doi:10.1016/j.red.2016.09.006)

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Abstract

The paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies with lack of commitment when default induces a permanent loss of access to international credit markets. We show, by means of examples, that a sovereign's creditworthiness is not necessarily limited by the ability to repay out of its future resources. Self-enforcing debt grows at the same rate as interest rates. If a sovereign's endowment growth rates are lower than interest rates, then debt limits eventually exceed the natural debt limits. This implies that there is asymptotic borrowing in present value terms. We show that this can be compatible with lending incentives when credible borrowers facilitate inter-temporal exchange, acting as pass-through intermediaries that alleviate the lenders' credit restrictions.

Item Type:Articles
Additional Information:The financial support of CNPq is gratefully acknowledged by V. Filipe Martins-da-Rocha. Yiannis Vailakis acknowledges the financial support of an ERC starting grant (FP7, DCFM 240983) and of two ANR research grants (Projects Novo Tempus and FIRE)
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:Review of Economic Dynamics
Publisher:Elsevier
ISSN:1094-2025
ISSN (Online):1096-6099
Published Online:05 October 2016
Copyright Holders:Copyright © 2016 Elsevier
First Published:First published in Review of Economic Dynamics 23:42-59
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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