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Unique equilibrium in the Eaton–Gersovitz model of sovereign debt

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  • Auclert, Adrien
  • Rognlie, Matthew

Abstract

A common view of sovereign debt markets is that they are prone to multiple equilibria. We prove that, to the contrary, Markov perfect equilibrium is unique in the widely studied model of Eaton and Gersovitz (1981), and we discuss multiple extensions and limitations of this finding. Our results show that no improvement in a borrower׳s reputation for repayment can be self-sustaining, thereby strengthening the Bulow and Rogoff (1989) argument that debt cannot be sustained by reputation alone.

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  • Auclert, Adrien & Rognlie, Matthew, 2016. "Unique equilibrium in the Eaton–Gersovitz model of sovereign debt," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 134-146.
  • Handle: RePEc:eee:moneco:v:84:y:2016:i:c:p:134-146
    DOI: 10.1016/j.jmoneco.2016.10.013
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    Cited by:

    1. Ayres, João & Navarro, Gaston & Nicolini, Juan Pablo & Teles, Pedro, 2018. "Sovereign default: The role of expectations," Journal of Economic Theory, Elsevier, vol. 175(C), pages 803-812.
    2. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1697-1755, Elsevier.
    3. Alessandro Dovis & Luigi Bocola, 2015. "Indeterminacy in Sovereign Debt Markets: An Empirical Investigation," 2015 Meeting Papers 694, Society for Economic Dynamics.
    4. Bloise, Gaetano & Polemarchakis, Herakles & Vailakis, Yiannis, 2017. "Sovereign debt and incentives to default with uninsurable risks," Theoretical Economics, Econometric Society, vol. 12(3), September.
    5. Sergio Rebelo & Neng Wang & Jinqiang Yang, 2018. "Rare Disasters, Financial Development, and Sovereign Debt," NBER Working Papers 25031, National Bureau of Economic Research, Inc.
    6. Mark Aguiar & Satyajit Chatterjee & Harold L. Cole & Zachary Stangebye, 2017. "Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal," Working Papers 17-7, Federal Reserve Bank of Philadelphia.
    7. Zachary Stangebye & Satyajit Chatterjee & Harold Cole & Mark Aguiar, 2016. "Self-Fulfilling Sovereign Debt Crises," 2016 Meeting Papers 360, Society for Economic Dynamics.
    8. Mark A. Aguiar & Manuel Amador, 2018. "Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models," NBER Working Papers 24683, National Bureau of Economic Research, Inc.
    9. Luigi Bocola & Alessandro Dovis, 2016. "Self-Fulfilling Debt Crises: A Quantitative Analysis," NBER Working Papers 22694, National Bureau of Economic Research, Inc.
    10. Bloise, Gaetano & Polemarchakis, Herakles & Vailakis, Yiannis, 2018. "Sustainable Debt," CRETA Online Discussion Paper Series 45, Centre for Research in Economic Theory and its Applications CRETA.
    11. Mark Aguiar & Satyajit Chatterjee & Harold Cole & Zachary Stangebye, 2017. "Self-Fulfilling Debt Crises, Revisited," NBER Working Papers 23312, National Bureau of Economic Research, Inc.
    12. xavier Ragot & Francois Le Grand, 2018. "Sovereign Default and Liquidity: The Case for a World Safe," 2018 Meeting Papers 889, Society for Economic Dynamics.
    13. Stangebye, Zachary R., 2020. "Beliefs and long-maturity sovereign debt," Journal of International Economics, Elsevier, vol. 127(C).
    14. Corsetti, Giancarlo & Maeng, Seung Hyun, 2020. "Debt Crises, Fast and Slow," CEPR Discussion Papers 14868, C.E.P.R. Discussion Papers.
    15. Stangebye, Zachary, 2015. "Dynamic Panics: Theory and Application to the Eurozone," MPRA Paper 69967, University Library of Munich, Germany.

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