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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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Bibliographic Info

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. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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Cited by:
  1. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
  2. Emanuel Kohlscheen, 2010. "Sovereign risk: constitutions rule," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 62-85, January.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

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