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Sustainable Debt

Author

Listed:
  • Bloise, Gaetano

    (Yeshiva University)

  • Polemarchakis, Herakles

    (University of Warwick)

  • Vailakis, Yiannis

    (University of Glasgow)

Abstract

Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. Under incomplete markets, when the rate of interest (net of growth) is recurrently negative, self-insurance is more costly than borrowing, and repayments on loans are enforced by he implicit threat of loss of risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money and, in general, is not valued as a speculative bubble; it is distinct from outside money. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.

Suggested Citation

  • Bloise, Gaetano & Polemarchakis, Herakles & Vailakis, Yiannis, 2018. "Sustainable Debt," The Warwick Economics Research Paper Series (TWERPS) 1178, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1178
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    References listed on IDEAS

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    Keywords

    Rate of interest ; self-enforcing debt ; reputational debt ; incomplete;
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