Rational Liquidity Crises in the Sovereign Debt Market: In Search of a Theory
AbstractThis paper studies under what circumstances creditworthy sovereign borrowers may be denied liquidity by rational creditors. It is shown that, when the creditor side of the market consists of many small investors, multiple rational expectations equilibria may exist. In one equilibrium, creditors' pessimistic expectations about the borrower's creditworthiness become self-fulfilling, and the borrower experiences a liquidity crisis. Multiple equilibria can be avoided by marketing the loan appropriately or by developing a reputation for following good policies. Liquidity problems can also arise because international bond markets are temporarily disrupted owing to events unrelated to the borrower's circumstances. Policy responses are discussed.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 96/38.
Date of creation: 01 Apr 1996
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Postal: International Monetary Fund, Washington, DC USA
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Other versions of this item:
- Enrica Detragiache, 1996. "Rational Liquidity Crises in the Sovereign Debt Market: In Search of a Theory," IMF Staff Papers, Palgrave Macmillan, vol. 43(3), pages 545-570, September.
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
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