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Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving reputation Models of Debt

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  • Harold L. Cole
  • Patrick J. Kehoe

Abstract

A traditional explanation for why sovereign governments repay debts is that they want to keep good reputations so they can easily borrow more. Bulow and Rogoff show that this argument is invalid under two conditions: (i) there is a single debt relationship, and (ii) regardless of their past actions, governments can earn the (possibly state-contingent) market rate of return by saving abroad. Bulow and Rogoff conjecture that, even under condition (ii), in more general reputation models with multiple relationships and spillover across them, reputation may support debt. This paper shows what is needed for this conjecture to be true.

Suggested Citation

  • Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation Spillover Across Relationships with Enduring and Transient Beliefs: Reviving reputation Models of Debt," NBER Working Papers 5486, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5486
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    References listed on IDEAS

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    1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077, Elsevier.
    2. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-385, May.
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    9. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
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    Cited by:

    1. Federico Sturzenegger & Punan Chuham, 2003. "Default`s in the 1990`s: What have we learned?"," Business School Working Papers seis, Universidad Torcuato Di Tella.
    2. Cole, Harold L. & Kehoe, Patrick J., 1995. "The role of institutions in reputation models of sovereign debt," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 45-64, February.
    3. Rong Qian & Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?," NBER Chapters, in: NBER Macroeconomics Annual 2010, volume 25, pages 1-36, National Bureau of Economic Research, Inc.
    4. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077, Elsevier.
    5. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
    6. De Broeck, Mark, 1997. "The financial structure of government debt in OECD countries: An examination of the time-consistency issue," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 279-301, July.
    7. Mark Aguiar, 2011. "Comment on "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?"," NBER Chapters, in: NBER Macroeconomics Annual 2010, volume 25, pages 37-46, National Bureau of Economic Research, Inc.
    8. Araújo, Carlos Hamilton Vasconcelos, 2002. "Political risk, incentives and international credit market equilibrium," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 22(2), November.
    9. Karsten Jeske, 2006. "Private International Debt with Risk of Repudiation," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 576-593, June.
    10. Jeromin Zettelmeyer & Álvaro Leandro, 2018. "The Search for a Euro Area Safe Asset," Working Paper Series WP18-3, Peterson Institute for International Economics.
    11. Harold L. Cole & Patrick J. Kehoe, 1996. "Reputation spillover across relationships: reviving reputation models of debt," Staff Report 209, Federal Reserve Bank of Minneapolis.

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    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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