In this paper we produce a theory of partial default applicable to sovereign debt. The theory uses Markovian equilibria and the notion that circulating unpaid coupons of any given country courtail its productive capabilities. As a consequence no issues of equilibrium selection appear in the analysis. The theory allows for renegotiation of the debt which occurs in particular dire circumstances. This theory, in contrast with the ones in the literature, is consistent with the main facts of international debt crises, which we document.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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