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On the sovereign debt paradox

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Date
2017
Link to item file
https://hal.archives-ouvertes.fr/hal-01097118
Dewey
Economie financière
Sujet
Sovereign risk; Lack of commitment; Reputation debt
JEL code
G15; F34
Journal issue
Economic Theory
Volume
64
Number
4
Publication date
2017
Article pages
825-846
Publisher
Springer
DOI
http://dx.doi.org/10.1007/s00199-016-0971-6
URI
https://basepub.dauphine.fr/handle/123456789/15834
Collections
  • CEREMADE : Publications
Metadata
Show full item record
Author
Martins-da-Rocha, Victor-Filipe
Vailakis, Yiannis
Type
Article accepté pour publication ou publié
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.

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