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Sovereign Borrowing for Dubious Reforms: A model with applications on the EMU

Maximilian Ludwig ()
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Maximilian Ludwig: Hamburg University, Postal: Department of Economics, Hamburg University , Von-Melle-Park 5 , 20146 Hamburg, Germany

No 29/2013, Working Papers from Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE)

Abstract: This paper presents a model where governments need loans to finance reforms and may misuse these funds for consumption without immediately exposing this to its lenders. Such a misuse is ultimately followed by a sovereign default, therefore lenders will try to discipline governments in favor of true reforms. This puts a government and its lenders in a sequential game, which has two remarkable properties: First, discipling a government in favor of reforms may work, albeit far from perfect. Second, the game implies jumps in the interest rate as observed in the EMU debt crisis.

Keywords: Reforms; Sovereign default; Sequential Game; Bail-Out (search for similar items in EconPapers)
JEL-codes: C73 F34 H63 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-05-27
New Economics Papers: this item is included in nep-eec
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