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Borrowing in Excess of Natural Ability to Repay

Author

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  • Victor Filipe Martins da Rocha

    () (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique)

  • Yiannis Vailakis

    () (Adam Smith Business School - University of Glasgow)

Abstract

This paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies without commitment when default induces a permanent loss of access to international credit markets. We show, by means of two examples, that sovereigns can sustain self-enforcing debt levels in excess of their natural ability to repay represented by the present value of future endowments. This is in sharp contrast with the standard results in the full commitment literature and shows that the future resources for repayment and the market value of time (i.e., the interest rates) are not the only relevant aspects of a sovereign’s borrowing capacity. Indeed, we reveal a new channel through which self-enforcing debt is sustained at equilibrium: creditworthiness in international credit markets may reflect the intermediation services of the debtors to alleviate the financial frictions of potential creditors.

Suggested Citation

  • Victor Filipe Martins da Rocha & Yiannis Vailakis, 2015. "Borrowing in Excess of Natural Ability to Repay," Working Papers hal-01249202, HAL.
  • Handle: RePEc:hal:wpaper:hal-01249202
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01249202
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    More about this item

    Keywords

    Limited Commitment; Self-enforcing Debt; Natural Debt Limit;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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