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International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon

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  • Basu , Kaushik
  • Stiglitz, Joseph E.

Abstract

As the Eurozone crisis drags on, it is evident that a part of the problem lies in the architecture of debt and its liabilities within the Eurozone and, more generally, the European Union. This paper argues that a large part of the problem can be mitigated by permitting appropriately-structured cross-country liability for sovereign debt incurred by individual nations within the European Union. In brief, the paper makes a case for amending the Treaty of Lisbon. The case is established by constructing a game-theoretic model and demonstrating that there exist self-fulfilling equilibria, which would come into existence if cross-country debt liability were permitted and which are Pareto superior to the existing outcome.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6555.

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Date of creation: 01 Aug 2013
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Handle: RePEc:wbk:wbrwps:6555

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Keywords: Debt Markets; Access to Finance; Banks&Banking Reform; Bankruptcy and Resolution of Financial Distress; Economic Theory&Research;

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  1. Joseph Stiglitz & Jungyoll Yun, 2013. "Optimal Provision of Loans and Insurance Against Unemployment From A Lifetime Perspective," NBER Working Papers 19064, National Bureau of Economic Research, Inc.
  2. Patrick Rey & Joseph E. Stiglitz, 1993. "Short-Term Contracts as a Monitoring Device," NBER Working Papers 4514, National Bureau of Economic Research, Inc.
  3. Basu, Kaushik, 2003. "Prelude to Political Economy: A Study of the Social and Political Foundations of Economics," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199261857, October.
  4. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
  5. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  6. Basu, Kaushik & Morita, Hodaka, 2006. "International credit and welfare: A paradoxical theorem and its policy implications," European Economic Review, Elsevier, Elsevier, vol. 50(6), pages 1507-1528, August.
  7. Hatlebakk, M., 2000. "A New and Robust Subgame Perfect Equilibrium in a Model of Triadic Power Relations," Norway; Department of Economics, University of Bergen, Department of Economics, University of Bergen 2400, Department of Economics, University of Bergen.
  8. Espen Villanger, 2003. "Company interests and foreign aid policy: Playing donors out against each other," CMI Working Papers, CMI (Chr. Michelsen Institute), Bergen, Norway WP 2003:5, CMI (Chr. Michelsen Institute), Bergen, Norway.
  9. Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, American Economic Association, vol. 81(1), pages 179-90, March.
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