Sovereign Borrowing for Dubious Reforms: A model with applications on the EMU
AbstractThis paper presents a model where governments need loans to ﬁnance reforms and may misuse these funds for consumption without immediately exposing this to its lenders. Such a misuse is ultimately followed by a sovereign default, therefore lenders will try to discipline governments in favor of true reforms. This puts a government and its lenders in a sequential game, which has two remarkable properties: First, discipling a government in favor of reforms may work, albeit far from perfect. Second, the game implies jumps in the interest rate as observed in the EMU debt crisis.
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Bibliographic InfoPaper provided by Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE) in its series Working Papers with number 29/2013.
Length: 33 pages
Date of creation: 27 May 2013
Date of revision:
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More information through EDIRC
Reforms; Sovereign default; Sequential Game; Bail-Out;
Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
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