On the Sovereign Debt Paradox

Victor Filipe Martins da Rocha () and Yiannis Vailakis ()
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Victor Filipe Martins da Rocha: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Yiannis Vailakis: Adam Smith Business School - University of Glasgow
Authors registered in the RePEc Author Service: V. Filipe Martins-da-Rocha

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Abstract: Bulow and Rogoff (1989) showed that lending to small countries cannot be supported merely on the country's "reputation for repayment" if exclusion from future credit markets is the only consequence of default. Their arguments are valid under fairly general conditions but they do not go through when the output of the sovereign may vanish along a path of successive low productivity shocks, or when it may grow unboundedly along a path of successive high productivity shocks. We propose an alternative proof illustrating that their renowned sovereign debt paradox holds in full generality.

Keywords: Reputation Debt; Lack of Commitment; Sovereign Risk (search for similar items in EconPapers)
Date: 2017-12
Note: View the original document on HAL open archive server: https://hal.science/hal-01097118v2
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Citations: View citations in EconPapers (2)

Published in Economic Theory, 2017, 64, pp.825-846. ⟨10.1007/s00199-016-0971-6⟩

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Journal Article: On the sovereign debt paradox (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01097118

DOI: 10.1007/s00199-016-0971-6

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