Bloise, G., Polemarchakis, H. and Vailakis, Y. (2017) Sovereign debt and incentives to default with uninsurable risks. Theoretical Economics, 12(3), pp. 1121-1154. (doi: 10.3982/TE2146)
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Abstract
We show that sovereign debt is unsustainable if debt contracts are not supported by direct sanctions and default carries only a ban from ever borrowing in financial markets even in the presence of uninsurable risks and time-varying interest rate. This extension of Bulow and Rogoff (1989) requires that the present value of the endowment be finite under the most optimistic valuation. We provide examples where this condition fails and sovereign debt is sustained by the threat of loss of insurance opportunities upon default, despite the fact that the most pessimistic valuation of the endowment, the natural debt limit, is finite.
Item Type: | Articles |
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Status: | Published |
Refereed: | Yes |
Glasgow Author(s) Enlighten ID: | Vailakis, Professor Yiannis |
Authors: | Bloise, G., Polemarchakis, H., and Vailakis, Y. |
College/School: | College of Social Sciences > Adam Smith Business School > Economics |
Journal Name: | Theoretical Economics |
Publisher: | Econometric Society |
ISSN: | 1933-6837 |
ISSN (Online): | 1555-7561 |
Published Online: | 22 September 2017 |
Copyright Holders: | Copyright © 2017 The Authors. Theoretical Economics. The Econometric Society |
First Published: | First published in Theoretical Economics 12(3): 1121-1154 |
Publisher Policy: | Reproduced under a Creative Commons license |
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