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A Constant Recontracting Model of Sovereign Debt

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Author Info
Jeremy I. Bulow
Kenneth Rogoff

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Abstract

Few sovereign debtors have repudiated their obligations entirely. But despite the significant sanctions at the disposal of lenders, many borrowers have been able to consistently negotiate for reduced repayments. This paper presents a model of the on-going bargaining process that determines repayment levels. We derive a bargaining equilibrium in which countries with large debts achieve negotiated partial default. The ability to credibly threaten more draconian penalties in the event of repudiation may be of no benefit to lenders. Furthermore, unanticipated increases in world interest rates may actually help the borrowers by making lenders more inpatient for a negotiated settlement. Finally, Western governments may be induced to make payments to facilitate reschedulings even though efficient agreements will be reached without their intervention.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2088.

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Date of creation: Feb 1987
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Publication status: published as Journal of Political Economy, Vol. 95, No. 6, December 1988.
Handle: RePEc:nbr:nberwo:2088

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Cohen, Daniel & Sachs, Jeffrey, 1986. "Growth and external debt under risk of debt repudiation," European Economic Review, Elsevier, vol. 30(3), pages 529-560, June. [Downloadable!] (restricted)
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  2. Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November. [Downloadable!] (restricted)
  3. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Sutton, John, 1986. "Non-cooperative Bargaining Theory: An Introduction," Review of Economic Studies, Blackwell Publishing, vol. 53(5), pages 709-24, October. [Downloadable!] (restricted)
  5. Eliot Kalter & G. Russell Kincaid & Donald J. Mathieson & Maxwell Watson, 1986. "International Capital Markets: Developments and Prospects," IMF Occasional Papers 43, International Monetary Fund.
  6. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
  7. Steven C. Kyle & Jeffrey Sachs, 1984. "Developing Country Debt and the Market Value of Large Commercial Banks," NBER Working Papers 1470, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Sebastian Edwards, 1986. "The Pricing of Bonds and Bank Loans in International Markets: An Empirical Analysis of Developing Countries' Foreign Borrowing," NBER Working Papers 1689, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Dixit, Avinash, 1987. " Issues of Strategic Trade Policy for Small Countries," Scandinavian Journal of Economics, Blackwell Publishing, vol. 89(3), pages 349-67.
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