Models of Sovereign Debt: Partial versus General Reputations

Harold Cole and Patrick Kehoe

International Economic Review, 1998, vol. 39, issue 1, 55-70

Abstract: Some economists argue that as long as governments can earn the market rate of return by saving abroad, standard reputation models cannot support debt. The authors argue that these standard reputation models are partial in the sense that actions of agents in one arena affect reputation in that arena only. The authors develop a general model of reputation in which if a government is viewed as untrustworthy in one relationship this government will he viewed as untrustworthy in other relationships. They show that their general model of reputation can support large amounts of debt. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1998
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