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Fiscal Adjustment and Official Reserves in Sovereign Debt Negotiations

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  • Detragiache, Enrica

Abstract

Empirical studies indicate that official reserves increase the creditworthiness of highly indebted countries. This evidence cannot be explained by existing bargaining models of sovereign debt because sovereign immunity shelters official reserves from creditors' seizure. In the model proposed here, to service foreign debt the government must raise revenue through distortionary taxation. Large reserves reduce the fiscal burden of debt service, weakening the bargaining position of the debtor and resulting in larger transfers to foreign creditors. In these circumstances, the debtor country may be better-off repurchasing debt on the secondary market rather than accumulating official reserves. Copyright 1996 by The London School of Economics and Political Science.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 63 (1996)
Issue (Month): 249 (February)
Pages: 81-95

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Handle: RePEc:bla:econom:v:63:y:1996:i:249:p:81-95

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Cited by:
  1. Robert P. Flood & Nancy P. Marion, 2002. "Holding International Reserves in an Era of High Capital Mobility," IMF Working Papers 02/62, International Monetary Fund.
  2. Emanuel Kohlscheen & Stephen A O'Connell, 2006. "A Sovereign Debt Model with Trade Credit and Reserves," WEF Working Papers 0004, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  3. Laura Alfaro & Fabio Kanczuk, 2007. "Optimal reserve management and sovereign debt," Working Paper Series 2007-29, Federal Reserve Bank of San Francisco.
  4. Joshua Aizenman & Nancy Marion, 2004. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Economic Journal, Royal Economic Society, vol. 114(497), pages 569-591, 07.
  5. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
  6. Antonio Francisco A. Silva Jr, 2011. "The Self-insurance Role of International Reserves and the 2008-2010 Crisis," Working Papers Series 256, Central Bank of Brazil, Research Department.

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