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Sovereign debt signals

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  • Phan, Toan

Abstract

This paper develops a theory of sovereign borrowing, where the interaction between the asymmetry of information and the lack of commitment for repayment leads to a novel signaling motive for the issuance of sovereign debt. If the government is more informed than foreign investors about a fundamental of the domestic economy, then debt provides the government an option to credibly signal good news in the future by repaying. Thus, the government has an incentive to issue debt, even in the absence of the traditional consumption smoothing or tilting motives.

Suggested Citation

  • Phan, Toan, 2017. "Sovereign debt signals," Journal of International Economics, Elsevier, vol. 104(C), pages 157-165.
    • Handle: RePEc:eee:inecon:v:104:y:2017:i:c:p:157-165
    DOI: 10.1016/j.jinteco.2016.11.005
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    References listed on IDEAS

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    Cited by:

    1. Egemen Eren & Semyon Malamud & Haonan Zhou, 2023. "Signaling with debt currency choice," BIS Working Papers 1067, Bank for International Settlements.
    2. Joo, Hyungseok & Lee, Yoon-Jin & Yoon, Young-Ro, 2023. "Effects of information quality on signaling through sovereign debt issuance," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 279-304.
    3. Toan Phan & Felipe Schwartzman, 2023. "Climate Defaults and Financial Adaptation," Working Paper 23-06, Federal Reserve Bank of Richmond.
    4. Victor Filipe Martins da Rocha & Toan Phan & Yiannis Vailakis, 2019. "Debt Limits and Credit Bubbles in General Equilibrium," Post-Print hal-02429759, HAL.
    5. Stangebye, Zachary R., 2020. "Beliefs and long-maturity sovereign debt," Journal of International Economics, Elsevier, vol. 127(C).
    6. Toan Phan, 2016. "Information, Insurance and the Sustainability of Sovereign Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 93-108, October.
    7. Konstantin Egorov & Michal Fabinger, 2016. "Reputational Effects in Sovereign Default," CIRJE F-Series CIRJE-F-999, CIRJE, Faculty of Economics, University of Tokyo.
    8. Nada Azmy Elberry & Frank Naert & Stijn Goeminne, 2023. "Optimal public debt composition during debt crises: A review of theoretical literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 351-376, April.
    9. Phan, Toan, 2017. "A model of sovereign debt with private information," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 1-17.
    10. Bulent Guler & Yasin Kursat Onder & Temel Taskin, 2022. "Asymmetric Information and Sovereign Debt Disclosure," CAEPR Working Papers 2022-004 Classification-E, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.

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    More about this item

    Keywords

    Sovereign debt; Private information; Signaling; Lack of commitment; Foreign direct investment;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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