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Sovereign Debt: Forgiving and Forgetting Reconsidered

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Author Info
Wolfgang Pesendorfer

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Abstract

In this note we show that even if after default a sovereign can make deposits on a Swiss bank account, the exclusion from future debt is sufficient to deter a patient country from default. In contrast to the work by Bulow and Rogoff (1989) we assume that there is a fixed set of standard assets on the world financial markets in which the country can trade. In this setting the exclusion from future borrowing may seriously limit a country's ability to smooth consumption. Therefore the traditional reputational logic can be applied.

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File URL: http://www.kellogg.northwestern.edu/research/math/papers/1016.pdf
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1016.

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Date of creation: Nov 1992
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Handle: RePEc:nwu:cmsems:1016

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  1. 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. [Downloadable!] (restricted)
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  2. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and debt," Staff Report 125, Federal Reserve Bank of Minneapolis. [Downloadable!]
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(explanations, 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. Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation spillover across relationships: reviving reputation models of debt," Staff Report 209, Federal Reserve Bank of Minneapolis. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
  3. Christian Hellwig & Guido Lorenzoni, 2006. "Bubbles and Self-enforcing Debt," Levine's Bibliography 321307000000000383, UCLA Department of Economics. [Downloadable!]
    Other versions:
  4. Harold L. Cole & Patrick J. Kehoe, 1997. "Models of sovereign debt: partial vs. general reputations," Working Papers 580, Federal Reserve Bank of Minneapolis. [Downloadable!]
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