Sovereign debt signals

Toan Phan

Journal of International Economics, 2017, vol. 104, issue C, 157-165

Abstract: This paper develops a theory of sovereign borrowing, where the interaction between the asymmetry of information and the lack of commitment for repayment leads to a novel signaling motive for the issuance of sovereign debt. If the government is more informed than foreign investors about a fundamental of the domestic economy, then debt provides the government an option to credibly signal good news in the future by repaying. Thus, the government has an incentive to issue debt, even in the absence of the traditional consumption smoothing or tilting motives.

Keywords: Sovereign debt; Private information; Signaling; Lack of commitment; Foreign direct investment (search for similar items in EconPapers)
JEL-codes: F34 F4 G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:104:y:2017:i:c:p:157-165

DOI: 10.1016/j.jinteco.2016.11.005

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