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Grace Periods in Sovereign Debt

Mehmet Bac

Review of International Economics, 1999, vol. 7, issue 2, 322-27

Abstract: This paper presents a theoretical analysis of grace periods in the context of an overhang of external debt creating a tax on domestic investment. The grace period arises as a Nash equilibrium strategy of the creditor in a dynamic, noncooperative game. Its length is shown to depend on the planning horizon of the parties, the discount factor and the growth prospect of the debtor country. Copyright 1999 by Blackwell Publishing Ltd.

Date: 1999
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