 Sovereign Default and Private Government InformationNo 8, Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam Abstract: This paper develops a model of sovereign debt in which the government has some private information about the domestic economy. Sovereign borrowing is sustainable without enforcement, as repayment is a costly signal about the hidden economic fundamental. The signaling mechanism is able to jointly explain three empirical observations: (1) sovereign defaults usually happen in bad macroeconomic conditions, (2) foreign credit to the private sector contracts after the government defaults and expands after subsequent improvements in sovereign ratings, and (3) the current accounts and interest rates are usually counter-cyclical, especially in emerging markets. Furthermore the model reveals a novel positive externality of precautionary savings on the sustainability of sovereign debt. It also predicts that domestic agents, if left on their own, will under-insure against the risk of sovereign defaults. A numerical exercise shows that the information channel can explain a nontrivial level of sovereign borrowing. Overall, the paper argues that private government information plays an important role in understanding a country's ability to borrow from abroad. Keywords: Sovereign; private external debt; asymmetric information; precautionary savings (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:dpc:wpaper:0812 Access Statistics for this paper More papers in Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam Contact information at EDIRC. |
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