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Reviving reputation models of international debt

  • Harold L. Cole
  • Patrick J. Kehoe

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.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1997)
Issue (Month): Win ()
Pages: 21-30

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Handle: RePEc:fip:fedmqr:y:1997:i:win:p:21-30:n:v.21no.1
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