Optimal sovereign lending and default

Jie Luo () and Cheng Wang

Journal of International Economics, 2018, vol. 111, issue C, 190-213

Abstract: A model of dynamic contracting with private information is constructed to study sovereign lending and default. The model endogenizes debt exclusion and provides a theory of reentry and a theory of debt dynamics within the exclusion period. It explains why countries may end up more indebted after the exclusion period. It offers an interpretation for the mixed evidence on the correlation between default probability and indebtedness. It also explains the observed positive correlation between the duration of default and the size of haircut.

Keywords: Sovereign lending; Default; Dynamic contracting (search for similar items in EconPapers)
JEL-codes: D86 F34 H63 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:111:y:2018:i:c:p:190-213

DOI: 10.1016/j.jinteco.2018.01.006

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