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Sustainable debt

Author

Listed:
  • Bloise, Gaetano

    (Department of Economics, Yeshiva University and University of Rome III)

  • Polemarchakis, Herakles

    (Department of Economics, University of Warwick)

  • Vailakis, Yiannis

    (Adam Smith Business School, University of Glasgow)

Abstract

We show that debt is sustainable at a competitive equilibrium based solely on the reputation for repayment; that is, even without collateral or legal sanctions available to creditors. In an incomplete asset market, when the rate of interest falls recurrently below the rate of growth of the economy, self-insurance is more costly than borrowing, and repayments on loans are enforced by the implicit threat of loss of the risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money, and it is not valued as a speculative bubble. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.

Suggested Citation

  • Bloise, Gaetano & Polemarchakis, Herakles & Vailakis, Yiannis, 2021. "Sustainable debt," Theoretical Economics, Econometric Society, vol. 16(4), November.
    • Handle: RePEc:the:publsh:4173
    as

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    References listed on IDEAS

    as
    1. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, July.
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    More about this item

    Keywords

    Rate of interest; self-enforcing debt; Ponzi games; incomplete markets; competitive equilibrium; gains from trade;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • 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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