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A Sovereign Debt Model with Trade Credit and Reserves

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  • Kohlscheen, Emanuel

    (University of Warwick)

  • O'Connell, Stephen A.

    (Swarthmore College, PA)

Abstract

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 743.

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Length: 58 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:743

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  1. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," NBER Working Papers 5131, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Emanuel Kohlscheen, 2010. "Sovereign risk: constitutions rule," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 62-85, January.
  2. Michael Tomz & Mark L. J. Wright, 2012. "Empirical research on sovereign debt and default," Working Paper Series WP-2012-06, Federal Reserve Bank of Chicago.
  3. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
  4. Enrique G. Mendoza & Vivian Z. Yue, 2011. "A General Equilibrium Model of Sovereign Default and Business Cycles," NBER Working Papers 17151, National Bureau of Economic Research, Inc.
  5. Amrita Dhillon & Javier García-Fronti & Sayantan Ghosal & Marcus Miller, 2006. "Debt Restructuring and Economic Recovery: Analysing the Argentine Swap," The World Economy, Wiley Blackwell, vol. 29(4), pages 377-398, 04.
  6. Eduardo Borensztein & Ugo Panizza, 2008. "The Costs of Sovereign Default," IMF Working Papers 08/238, International Monetary Fund.
  7. García-Fronti, Javier & Miller, Marcus & Zhang, Lei, 2005. "Credit Crunch and Keynesian Contraction: Argentina in Crisis," CEPR Discussion Papers 4889, C.E.P.R. Discussion Papers.
  8. Antonio Francisco A. Silva Jr, 2011. "The Self-insurance Role of International Reserves and the 2008-2010 Crisis," Working Papers Series 256, Central Bank of Brazil, Research Department.

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