A contraction for sovereign debt models

Mark Aguiar and Manuel Amador

Journal of Economic Theory, 2019, vol. 183, issue C, 842-875

Abstract: Using a dual representation, we show that the Markov equilibria of the one-period-bond Eaton and Gersovitz (1981) incomplete markets sovereign debt model can be represented as a fixed point of a contraction mapping, providing a new proof of the uniqueness and existence of equilibrium in the benchmark sovereign debt model. The arguments can be extended to incorporate re-entry probabilities after default when the shock process is iid. Our representation of the equilibrium bears many similarities to an optimal contracting problem. We use this to argue that commitment to budget rules has no value to a benevolent government. We show how the introduction of long-term bonds breaks the link to the constrained planning problem.

Keywords: Sovereign debt; Uniqueness of equilibria; Existence of equilibria; Eaton-Gersovitz; One period bonds; Time-consistency (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:842-875

DOI: 10.1016/j.jet.2019.08.005

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