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Credibility For Sale

Dirk Niepelt () and Harris Dellas ()

No 12, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a model with official and private creditors where the probability of sovereign default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay but also carries extra costs such as reduced ex post flexibility. We characterize the equilibrium composition of debt across creditor groups. Our model can account for important features of sovereign debt crises: Namely, that official lending to sovereigns takes place only in times of debt distress, carries a favorable rate and tends to displace private funding. It also offers a novel perspective on the relationship between debt overhang and default risk: The availability of official debt makes default on outstanding debt more likely.

Date: 2013
New Economics Papers: this item is included in nep-dge
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Working Paper: Credibility for Sale (2013) Downloads
Working Paper: Credibility For Sale (2013) Downloads
Working Paper: Credibility For Sale (2013) Downloads
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