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Sovereign Debt and Consumption Smoothing

This paper shows that whether or not a sovereign can borrow to smooth consump- tion depends both on how consumption smoothing is achieved, whether by contingent debt issuance or by contingent debt servicing, and on the penalty for debt repudiation. If a sovereign that repudiated its debt could not borrow again, but could continue to save and to dissave, then contingent debt issuance, without contingent debt servicing, cannot support a positive amount of uncollateralized sovereign debt. But, with this same penalty for repu- diation, contingent debt servicing supports a positive amount of uncollateralized sovereign debt.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 97-6.

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Length: 13 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:bro:econwp:97-6
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Eaton, Jonathan, 1992. "Sovereign debt : a primer," Policy Research Working Paper Series 855, The World Bank.
  2. Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June.
    • 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. 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.
  4. Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, vol. 34(5), pages 1099-1109, July.
  5. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  6. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and debt," Staff Report 125, Federal Reserve Bank of Minneapolis.
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