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Borrowing in Excess of Natural Ability to Repay

V. Filipe Martins-da-Rocha () and Yiannis Vailakis

Review of Economic Dynamics, 2017, vol. 23, 42-59

Abstract: The paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies with lack of commitment when default induces a permanent loss of access to international credit markets. We show, by means of examples, that a sovereign's creditworthiness is not necessarily limited by the ability to repay out of its future resources. Self-enforcing debt grows at the same rate as interest rates. If a sovereign's endowment growth rates are lower than interest rates, then debt limits eventually exceed the natural debt limits. This implies that there is asymptotic borrowing in present value terms. We show that this can be compatible with lending incentives when credible borrowers facilitate inter-temporal exchange, acting as pass-through intermediaries that alleviate the lenders' credit restrictions. (Copyright: Elsevier)

Keywords: Lack of Commitment; Self-enforcing Debt; Natural Debt Limit (search for similar items in EconPapers)
JEL-codes: D50 D51 F34 G13 H63 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.red.2016.09.006

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