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Competitive equilibria with limited enforcement

  • Patrick J. Kehoe
  • Fabrizio Perri

We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy, these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital, these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 307.

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Date of creation: 2003
Date of revision:
Publication status: Published in Journal of Economic Theory (Vol. 119, No. 1, November 2004, pp. 184-206)
Handle: RePEc:fip:fedmsr:307
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  1. Karsten Jeske, 2005. "Private international debt with risk of repudiation," FRB Atlanta Working Paper 2001-16, Federal Reserve Bank of Atlanta.
  2. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  3. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
  4. Juha Seppala, 2000. "Asset Prices And Business Cycles Under Limited Commitment," Computing in Economics and Finance 2000 319, Society for Computational Economics.
  5. Brian D. Wright & Kenneth M. Kletzer, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June.
  6. V. V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  7. repec:oup:restud:v:60:y:1993:i:4:p:865-88 is not listed on IDEAS
  8. repec:oup:restud:v:69:y:2002:i:1:p:209-44 is not listed on IDEAS
  9. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  10. Patrick J. Kehoe & Fabrizio Perri, 2000. "International Business Cycles with Endogenous Incomplete Markets," NBER Working Papers 7870, National Bureau of Economic Research, Inc.
  11. repec:oup:restud:v:63:y:1996:i:4:p:595-609 is not listed on IDEAS
  12. Mark L. J. Wright, 2004. "Private capital flows, capital controls, and default risk," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  13. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  14. repec:oup:restud:v:60:y:1993:i:1:p:175-95 is not listed on IDEAS
  15. Baxter, M. & Crucini, M., 1991. "Business Cycles and the Asset Structure of Foreign Trade," RCER Working Papers 316, University of Rochester - Center for Economic Research (RCER).
  16. repec:oup:restud:v:48:y:1981:i:2:p:289-309 is not listed on IDEAS
  17. V. V. Chari & Patrick J. Kehoe, 1993. "Sustainable Plans and Mutual Default," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 175-195.
  18. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
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