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Borrowing in Excess of Natural Ability to Repay

Victor Filipe Martins da Rocha () and Yiannis Vailakis ()
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Victor Filipe Martins da Rocha: EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - 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: 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.

Keywords: Limited Commitment; Self-enforcing Debt; Natural Debt Limit (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge and nep-opm
Date: 2017-01-02
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01249202
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Published in Review of Economic Dynamics, Elsevier, 2017, 23, pp.42-59. 〈https://www.sciencedirect.com/science/article/pii/S109420251630031X?via%3Dihub〉. 〈10.1016/j.red.2016.09.006〉

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01249202

DOI: 10.1016/j.red.2016.09.006

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