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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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