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Reputation and Partial Default

Manuel Amador and Christopher Phelan

American Economic Review: Insights, 2023, vol. 5, issue 2, 158-72

Abstract: This paper presents a continuous-time reputation model of sovereign debt allowing for both varying levels of partial default and full default. In it, a government can be a nonstrategic commitment type or a strategic opportunistic type, and a government's reputation is its equilibrium Bayesian posterior of being the commitment type. Our equilibrium has that for bond levels reachable by both types without defaulting, bigger partial defaults (or bigger haircuts for bond holders) imply higher interest rates for subsequent bond issuances, as in the data.

JEL-codes: D83 E32 E43 G12 H63 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1257/aeri.20210739

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