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Optimal sovereign lending and default

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  • Luo, Jie
  • Wang, Cheng

Abstract

A model of dynamic contracting with private information is constructed to study sovereign lending and default. The model endogenizes debt exclusion and provides a theory of reentry and a theory of debt dynamics within the exclusion period. It explains why countries may end up more indebted after the exclusion period. It offers an interpretation for the mixed evidence on the correlation between default probability and indebtedness. It also explains the observed positive correlation between the duration of default and the size of haircut.

Suggested Citation

  • Luo, Jie & Wang, Cheng, 2018. "Optimal sovereign lending and default," Journal of International Economics, Elsevier, vol. 111(C), pages 190-213.
    • Handle: RePEc:eee:inecon:v:111:y:2018:i:c:p:190-213
    DOI: 10.1016/j.jinteco.2018.01.006
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    More about this item

    Keywords

    Sovereign lending; Default; Dynamic contracting;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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