On the sovereign debt paradox

Martins-da-Rocha, Victor-Filipe; Vailakis, Yiannis

Martins-da-Rocha, Victor-Filipe; Vailakis, Yiannis (2017), On the sovereign debt paradox, Economic Theory, 64, 4, p. 825-846. 10.1007/s00199-016-0971-6

Type

Article accepté pour publication ou publié

External document link

https://hal.archives-ouvertes.fr/hal-01097118

Date

2017

Journal name

Economic Theory

Volume

Number

Publisher

Springer

Pages

825-846

Abstract (EN)

Bulow and Rogoff (Am Econ Rev 79(1):43–50, 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.

Subjects / Keywords

Sovereign risk; Lack of commitment; Reputation debt

JEL

G15 - International Financial Markets
F34 - International Lending and Debt Problems