Sovereign Debt without Default Penalties

Alexander Guembel () and Oren Sussman

The Review of Economic Studies, 2009, vol. 76, issue 4, 1297-1320

Abstract: We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding (a) the role of financial intermediaries in sovereign lending, (b) the effect of capital flows on price volatility including the possible overvaluation of debt to the point that the median voter is priced out of the market, and (c) debt restructuring where creditors are highly dispersed. Copyright 2009, Wiley-Blackwell.

Date: 2009
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Related works:
Working Paper: Sovereign Debt without Default Penalties (2009)
Working Paper: Sovereign Debt Without Default Penalties (2005)
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