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Nominally Sovereign Debt, Risk Shifting, and Reputation

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  • Herschel I. Grossman
  • John B. Van Huyck

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2259.

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Date of creation: May 1987
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Publication status: published as Journal of Economics and Business, Vol. 45, Nos. 3 & 4, pp. 341-352 (August , October 1993)
Handle: RePEc:nbr:nberwo:2259

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References

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  1. Herschel I. Grossman, 1987. "A Generic Model of Monetary Policy, Inflation, and Reputation," NBER Working Papers 2239, 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, Northwestern University, Center for Mathematical Studies in Economics and Management Science 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. 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.
  4. Lucas, Robert Jr., 1986. "Principles of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 117-134, January.
  5. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 127-140, January.
  6. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 124, C.E.P.R. Discussion Papers.
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Cited by:
  1. Herschel I. Grossman, 1988. "The Political Economy of War Debts and Inflation," NBER Working Papers 2743, National Bureau of Economic Research, Inc.
  2. Herschel I. Grossman, 1987. "Lending to an Insecure Sovereign," NBER Working Papers 2443, National Bureau of Economic Research, Inc.
  3. Prasanna Gai & Kang-yong Tan, 2004. "Good Housekeeping? Reputation, Fixed Exchange Rates, and the 'Original Sin' Problem," Working Papers, Hong Kong Institute for Monetary Research 082004, Hong Kong Institute for Monetary Research.
  4. Amnon Levy, 1997. "Sovereign debt: Reputation, seizure and reputation," Journal of Economics and Finance, Springer, Springer, vol. 21(1), pages 69-79, March.

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