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Reviving reputation models of international debt

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  • Harold L. Cole
  • Patrick J. Kehoe

Abstract

A traditional explanation for why sovereign countries repay debt is that they want to keep a good reputation so they can easily borrow more. This explanation does not hold if a country has access to an adequate means of savings regardless of the country's past actions. With such access, a country gets only transient benefits from maintaining a good relationship with bankers, and such benefits cannot support borrowing. However, if a country is involved in a myriad of trust relationships, the country's reputation can spill over to a nondebt relationship which has enduring benefits. Such a spillover can allow a country's reputation to support a large amount of borrowing.

Suggested Citation

  • Harold L. Cole & Patrick J. Kehoe, 1997. "Reviving reputation models of international debt," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 21-30.
  • Handle: RePEc:fip:fedmqr:y:1997:i:win:p:21-30:n:v.21no.1
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, pages 621-639.
    2. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, pages 1523-1555.
    3. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, pages 189-206.
    4. Vivian Norambuena, 2015. "Sovereign Debt Default: Are Countries Trapped by Their Own Default History?," Working Papers wp416, University of Chile, Department of Economics.
    5. Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
    6. Marc Weidenmier, 2004. "Gunboats, Reputation, and Sovereign Repayment: Lessons from the Southern Confederacy," NBER Working Papers 10960, National Bureau of Economic Research, Inc.
    7. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, pages 243-254.
    8. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, pages 690-712.
    9. Weidenmier, Marc D., 2005. "Gunboats, reputation, and sovereign repayment: lessons from the Southern Confederacy," Journal of International Economics, Elsevier, pages 407-422.
    10. Guido Sandleris & Filippo Taddei, 2007. "Indexed Sovereign Debt: a Survey and a Framework of Analysis," Carlo Alberto Notebooks 66, Collegio Carlo Alberto.
    11. Andrew K. Rose & Mark M. Spiegel, 2009. "Noneconomic Engagement and International Exchange: The Case of Environmental Treaties," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 337-363, March.
    12. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    13. Fernando Broner & Jaume Ventura, 2011. "Globalization and Risk Sharing," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 49-82.
    14. Martinez, Jose Vicente & Sandleris, Guido, 2011. "Is it punishment? Sovereign defaults and the decline in trade," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 909-930, October.
    15. Obstfeld, Maurice, 1998. "EMU: Ready, or Not?," Center for International and Development Economics Research, Working Paper Series qt8qn3v8j3, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    16. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, pages 621-639.
    17. repec:eee:dyncon:v:83:y:2017:i:c:p:1-17 is not listed on IDEAS
    18. Wasseem Mina & Jorge Martinez-Vazquez, 2002. "IMF Lending, Maturity of International Debt and Moral Hazard," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0301, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    19. Phan, Toan, 2017. "Sovereign debt signals," Journal of International Economics, Elsevier, pages 157-165.
    20. Cyrus Munyua, 2016. "Factors Affecting Loan Default In Microfinance Institutions In Kirinyaga County," International Journal of Business and Management, International Institute of Social and Economic Sciences, vol. 4(3), pages 37-71, August.
    21. Mitchener, Kris James & Weidenmier, Marc D., 2010. "Supersanctions and sovereign debt repayment," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 19-36, February.
    22. Fernando Broner & Jaume Ventura, 2016. "Rethinking the Effects of Financial Globalization," The Quarterly Journal of Economics, Oxford University Press, vol. 131(3), pages 1497-1542.

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