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Sovereign debt, default and renegotiation

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Author Info

  • Rohan Pitchford
  • Mark Wright

    ()
    (Economics Stanford University)

Abstract

Can the international financial system be reformed to reduce the costs of sovereign defaults? What would the consequences of such ex post reforms be on the ex ante level of sovereign borrowing? This paper presents a simple model in which sovereign debt restructuring negotiations are plagued by limited commitment issues that lead to a holdout problem. Delay in bargaining produces costs ex post that may improve repayment incentives ex ante. The optimal level of holdout is derived, and the framework is used to evaluate a number of existing policy proposals

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 331.

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Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:331

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Keywords: sovereign debt; default;

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Cited by:
  1. Michael Tomz & Mark L. J. Wright, 2007. "Do countries default in “bad times”?," Working Paper Series 2007-17, Federal Reserve Bank of San Francisco.

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