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Debt with potential repudiation

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  • Worrall, Tim

Abstract

Lending across national boundaries is different from lending within national boundaries because of the difficulty of imposing legal sanctions. This note, examines a simple model of international lending where the borrower can repudiate, without legal sanction, if this is to his advantage. The model has an infinite time horizon and it is assumed the borrower has an i.i.d. income stream. It is shown that, although debt is initially restricted, in the long run consumption is completely stabilised.
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Suggested Citation

  • Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, vol. 34(5), pages 1099-1109, July.
  • Handle: RePEc:eee:eecrev:v:34:y:1990:i:5:p:1099-1109
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    References listed on IDEAS

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    1. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 541-554.
    2. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
    3. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
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    Cited by:

    1. Kletzer, Kenneth, 2004. "Sovereign Debt, Volatility and Insurance," Santa Cruz Center for International Economics, Working Paper Series qt71b785gd, Center for International Economics, UC Santa Cruz.
    2. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
    3. Grossman, Herschel I. & Han, Taejoon, 1999. "Sovereign debt and consumption smoothing," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 149-158, August.
    4. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
    5. Fafchamps, Marcel, 1996. "Sovereign debt, structural adjustment, and conditionality," Journal of Development Economics, Elsevier, vol. 50(2), pages 313-335, August.
    6. Kletzer, Kenneth M. & Newbery, David M. & Wright, Brian D., 1990. "Alternative instruments for smoothing the consumption of primary commodity exporters," Policy Research Working Paper Series 558, The World Bank.
    7. Kletzer, Kenneth, 1989. "Inefficient Private Renegotiation of Sovereign Debt," CEPR Discussion Papers 357, C.E.P.R. Discussion Papers.
    8. Aguiar, Mark & Amador, Manuel, 2014. "Sovereign Debt," Handbook of International Economics, Elsevier.
    9. Harold L. Cole & William B. English, 1992. "Direct investment: a doubtful alternative to international debt," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 12-22.
    10. Mark Aguiar & Manuel Amador, 2013. "Sovereign Debt: A Review," NBER Working Papers 19388, National Bureau of Economic Research, Inc.

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