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Reputation spillover across relationships: reviving reputation models of debt

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  • Harold L. Cole
  • Patrick J. Kehoe

Abstract

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid under two conditions: (i) there is a single debt relationship, and (ii) regardless of their past actions, governments can earn the (possibly state-contingent) market rate of return by saving abroad. Bulow and Rogoff conjecture that, even under condition (ii), in more general reputation models with multiple relationships and spillover across them, reputation may support debt. This paper shows what is needed for this conjecture to be true.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 209.

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Date of creation: 1996
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Handle: RePEc:fip:fedmsr:209

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Keywords: Debt;

References

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  1. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
  2. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  3. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  4. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
  5. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  6. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  7. Harold L. Cole & James Dow & William B. English, 1994. "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report 180, Federal Reserve Bank of Minneapolis.
  8. Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving reputation Models of Debt," NBER Working Papers 5486, National Bureau of Economic Research, Inc.
  9. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
  10. Douglas W. Diamond, 1998. "Reputation Acquisition in Debt Markets," Levine's Working Paper Archive 602, David K. Levine.
  11. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  12. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  13. Fernandez, Raquel & Rosenthal, Robert W, 1990. "Strategic Models of Sovereign-Debt Renegotiations," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 331-49, July.
  14. Wolfgang Pesendorfer, 1992. "Sovereign Debt: Forgiving and Forgetting Reconsidered," Discussion Papers 1016, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. Peter Montiel & Samir Jahjah, 2003. "Exchange Rate Policy and Debt Crises in Emerging Economies," IMF Working Papers 03/60, International Monetary Fund.
  2. Michael Kremer & Seema Jayachandran, 2002. "Odious Debt," NBER Working Papers 8953, National Bureau of Economic Research, Inc.
  3. Helmut Krämer-Eis, 1998. "Evaluierung hoheitlicher Länderrisiken," Working Paper Series B 1998-01, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät.
  4. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
  5. Michael Kremer & Paras Mehta, 2000. "Globalization and International Public Finance," NBER Working Papers 7575, National Bureau of Economic Research, Inc.
  6. Adrian Penalver, 2004. "How can the IMF catalyse private capital flows? A model," Bank of England working papers 215, Bank of England.
  7. Gerardo della Paolera & Alan M. Taylor, 2012. "Sovereign Debt in Latin America, 1820–1913," CEU Working Papers 2012_18, Department of Economics, Central European University, revised 19 Sep 2012.
  8. Loren Brandt & Arthur Hosios, 2004. "Informal Credit in Village Economies: Contract Duration with Personal and Community Enforcement," Law and Economics 0410001, EconWPA.
  9. Karsten Jeske, 2005. "Private international debt with risk of repudiation," Working Paper 2001-16, Federal Reserve Bank of Atlanta.
  10. Jean-Michel Severino & Pierre Jacquet, 2004. "Prêter, donner : comment aider ?," Revue d'Économie Financière, Programme National Persée, vol. 74(1), pages 285-317.
  11. Guillermo Ordonez, 2008. "Essays on Learning and Macroeconomics," Levine's Working Paper Archive 122247000000002250, David K. Levine.
  12. Guillermo Ordonez, 2005. "Don't Ask Why Things Went Wrong: Nested Reputation and Scapegoating Inefficiency," Levine's Working Paper Archive 618897000000000988, David K. Levine.

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