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Sovereign Debt: Forgiving and Forgetting Reconsidered

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  • Wolfgang Pesendorfer

Abstract

In this note we show that even if after default a sovereign can make deposits on a Swiss bank account, the exclusion from future debt is sufficient to deter a patient country from default. In contrast to the work by Bulow and Rogoff (1989) we assume that there is a fixed set of standard assets on the world financial markets in which the country can trade. In this setting the exclusion from future borrowing may seriously limit a country's ability to smooth consumption. Therefore the traditional reputational logic can be applied.

Suggested Citation

  • Wolfgang Pesendorfer, 1992. "Sovereign Debt: Forgiving and Forgetting Reconsidered," Discussion Papers 1016, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1016
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    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1016.pdf
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    References listed on IDEAS

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    1. 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, pages 1088-1097.
    2. Boyd, John H & Jagannathan, Ravi, 1994. "Ex-dividend Price Behavior of Common Stocks," Review of Financial Studies, Society for Financial Studies, pages 711-741.
    3. Chari V. V. & Kehoe Patrick J., 1993. "Sustainable Plans and Debt," Journal of Economic Theory, Elsevier, vol. 61(2), pages 230-261, December.
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    Cited by:

    1. Bloise, Gaetano & Polemarchakis, Herakles M & Vailakis, Yiannis, 2016. "Sovereign Debt and Incentives to Default with Uninsurable Risks," CRETA Online Discussion Paper Series 15, Centre for Research in Economic Theory and its Applications CRETA.
    2. Auclert, Adrien & Rognlie, Matthew, 2016. "Unique equilibrium in the Eaton–Gersovitz model of sovereign debt," Journal of Monetary Economics, Elsevier, pages 134-146.
    3. Christian Hellwig & Guido Lorenzoni, 2009. "Bubbles and Self-Enforcing Debt," Econometrica, Econometric Society, vol. 77(4), pages 1137-1164, July.
    4. Bloise, Gaetano & Vailakis, Yiannis & Polemarchakis, Herakles, 2017. "Sovereign debt and incentives to default with uninsurable risks," Theoretical Economics, Econometric Society.
    5. 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.
    6. Harold L. Cole & Patrick J. Kehoe, 1997. "Models of sovereign debt: partial vs. general reputations," Working Papers 580, Federal Reserve Bank of Minneapolis.
    7. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
    8. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.

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