On the sovereign debt paradox

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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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
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.
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
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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