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Nominal sovereign debt, risk shifting, and reputation

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Author Info

  • Grossman, Herschel I.
  • Van Huyck, John B.

Abstract

This paper analyzes a reputational equilibrium in a model in which nominally denominated sovereign debt serves to shift risk associated with the unpredictability of tax revenues from the sovereign to its lenders. The analysis answers the following set of related questions: Why would a sovereign refrain from inflating when faced with servicing a large quantity of nominal debt? If a sovereign does not plan to use inflation to repudiate its nominal debts, why would it want to issue nominal debt in the first place? What are the distinguishing features of those sovereigns who are willing and able to issue nominal debts?

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File URL: http://www.sciencedirect.com/science/article/B6V7T-47DD2VN-3T/2/3ce33d38e17c70e1e0a473749e2c5d62
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 45 (1993)
Issue (Month): 3-4 ()
Pages: 341-352

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Handle: RePEc:eee:jebusi:v:45:y:1993:i:3-4:p:341-352

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Web page: http://www.elsevier.com/locate/jeconbus

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References

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  1. Herschel I. Grossman & John B. Van Huyck, 1989. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  2. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
  4. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
  5. Lucas, Robert Jr., 1986. "Principles of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 117-134, January.
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Cited by:
  1. Amnon Levy, 1997. "Sovereign debt: Reputation, seizure and reputation," Journal of Economics and Finance, Springer, vol. 21(1), pages 69-79, March.
  2. Prasanna Gai & Kang-yong Tan, 2004. "Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem," Working Papers 082004, Hong Kong Institute for Monetary Research.

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