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A Sovereign Debt Model with Trade Credit and Reserves

  • Emanuel Kohlscheen

    (University of Warwick)

  • Stephen A O'Connell

    (Swarthmore College, PA)

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance.

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Paper provided by ESRC World Economy and Finance Research Programme, Birkbeck, University of London in its series WEF Working Papers with number 0004.

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Date of creation: Mar 2006
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Handle: RePEc:wef:wpaper:0004
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  7. 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.
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  17. Detragiache, Enrica, 1996. "Fiscal Adjustment and Official Reserves in Sovereign Debt Negotiations," Economica, London School of Economics and Political Science, vol. 63(249), pages 81-95, February.
  18. Rudiger Dornbusch, 1984. "Argentina Since Martinez De Hoz," NBER Working Papers 1466, National Bureau of Economic Research, Inc.
  19. Hellwig, Martin, 1986. "'The pure theory of country risk' by J. Eaton, M. Gersovitz and J. Stiglitz," European Economic Review, Elsevier, vol. 30(3), pages 521-527, June.
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  24. Frenkel, Jacob A & Jovanovic, Boyan, 1981. "Optimal International Reserves: A Stochastic Framework," Economic Journal, Royal Economic Society, vol. 91(362), pages 507-14, June.
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