Sovereign Risk in International Bond Markets and Nonconvergence
The paper analyzes the consequences of joining markets of government discount bonds between identical economies when, in each country, there exists a positive probability of the government to default. In autarky such economies of overlapping generations of consumers with capital accumulation converge to a unique positive steady state under certain conditions. When two identical economies of this type open their markets for bonds to the consumers of the other country, diversification in portfolio demand by consumers leads to the existence of a world equilibrium with a uniform bond price in every period. Under such circumstances a symmetric stationary world equilibrium with lower risk per country exists, supported by the same level of capital and income as under autarky. However, due to the interaction of dynamic spill over effects between the bond market and the domestic markets for capital investment, the symmetric steady state may become unstable and stable asymmetric steady states appear, implying symmetry breaking in the sense of Matsuyama (2004). The paper identifies a set of assumptions on consumer and production characteristics together with a range of values of the government’s default parameters, such that instability occurs and asymmetric steady states become locally stable.
|Date of creation:||Jun 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +45 6550 2233
Fax: +45 6550 1090
Web page: http://degit.sam.sdu.dk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Krugman, Paul & Venables, Anthony J, 1994.
"Globalization and the Inequality of Nations,"
CEPR Discussion Papers
1015, C.E.P.R. Discussion Papers.
- Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
- Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," NBER Working Papers 5098, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:deg:conpap:c014_034. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Pedersen)
If references are entirely missing, you can add them using this form.