Rescheduling of Sovereign Debt: Forgiveness, Precommitment, and New Money

Arnoud Boot and George Kanatas

Journal of Money, Credit and Banking, 1995, vol. 27, issue 2, 363-77

Abstract: The authors analyze debt renegotiation between a lender and a sovereign borrower. A sovereign, endowed with tradable and nontradable goods technologies and debt outstanding, may have the incentive to shift production to nontradable goods if lenders are able to seize foreign assets generated by the sale of tradables. The authors study an integrated rescheduling 'package' involving debt forgiveness, new money, and sovereign precommitment of production, and show that it Pareto-dominates pure debt relief. With asymmetric information between lender and sovereign, precommitment possibly becomes an even more important feature of the renegotiated agreement. Copyright 1995 by Ohio State University Press.

Date: 1995
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