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Sovereign Debt and Consumption Smoothing

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  • Herschel I. Grossman
  • Taejoon Han

Abstract

This paper shows that whether or not a sovereign can borrow to smooth consumption depends both on how consumption smoothing is achieved, whether by contingent debt issuance or by contingent debt servicing, and on the exact nature of the penalty for debt repudiation. If a sovereign that repudiated its debt could not borrow again, but could continue to save and to dissave, then contingent debt issuance, without contingent debt servicing, cannot support a positive amount of uncollateralized sovereign debt. But, under this same specification of the penalty for repudiation, contingent debt servicing supports a positive amount of uncollateralized sovereign debt.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5997.

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Date of creation: Apr 1997
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Publication status: published as Journal of Monetary Economics, Vol. 44, no. 1 (August 1999): 149-158.
Handle: RePEc:nbr:nberwo:5997

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  1. Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, vol. 34(5), pages 1099-1109, July.
  2. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
  3. 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.
  4. Herschel I. Grossman & John B. Van Huyck, 1989. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  5. Eaton, Jonathan, 1993. "Sovereign Debt: A Primer," World Bank Economic Review, World Bank Group, vol. 7(2), pages 137-72, May.
  6. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and debt," Staff Report 125, Federal Reserve Bank of Minneapolis.
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