Self-enforcing Debt, Reputation, and the Role of Interest Rates

Victor Filipe Martins da Rocha () and Yiannis Vailakis
Additional contact information
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, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]
Authors registered in the RePEc Author Service: V. Filipe Martins-da-Rocha

Working Papers from HAL

Abstract: How domestic costs of default do interact with the threat of exclusion from credit markets to determine interest rates and sovereign debt sustainability? In this paper, we address this question in the context of a stochastic general equilibrium model with lack of commitment and self-enforcing debt in which default has two consequences: loss of access to international borrowing and output costs. In contrast to Bulow and Rogoff (1989), we show that part of the ability to borrow is merely attributed to the threat of credit exclusion, or equivalently, to the loss of the sovereign's reputation. Apart from the limit case–analyzed by Hellwig and Lorenzoni (2009)–where output costs are absent, equilibrium interest rates are always higher than growth rates, implying that the way "reputation for repayment" supports debt does not depend on whether debt limits allow agents to exactly roll over existing debt period by period.

Keywords: Sovereign Debt; Default; Limited Commitment (search for similar items in EconPapers)
Date: 2014-12-18
New Economics Papers: this item is included in nep-dge
Note: View the original document on HAL open archive server: https://hal.science/hal-01097114v1
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://hal.science/hal-01097114v1/document (application/pdf)

Related works:
Working Paper: Self-enforcing Debt, Reputation, and the Role of Interest Rates (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01097114

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().