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Sovereign Borrowing for Dubious Reforms: A model with applications on the EMU

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  • Ludwig , Maximilian

    (Hamburg University)

Abstract

This paper presents a model where governments need loans to finance reforms and may misuse these funds for consumption without immediately exposing this to its lenders. Such a misuse is ultimately followed by a sovereign default, therefore lenders will try to discipline governments in favor of true reforms. This puts a government and its lenders in a sequential game, which has two remarkable properties: First, discipling a government in favor of reforms may work, albeit far from perfect. Second, the game implies jumps in the interest rate as observed in the EMU debt crisis.

Suggested Citation

  • Ludwig , Maximilian, 2013. "Sovereign Borrowing for Dubious Reforms: A model with applications on the EMU," Working Papers 29/2013, Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE).
  • Handle: RePEc:ris:cigewp:2013_029
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Reforms; Sovereign default; Sequential Game; Bail-Out;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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