A Sovereign Debt Model with Trade Credit and Reserves

Emanuel Kohlscheen and Stephen O'Connell ()

No 4, WEF Working Papers from ESRC World Economy and Finance Research Programme, Birkbeck, University of London

Abstract: This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance.

JEL-codes: F30 F34 (search for similar items in EconPapers)
Date: 2006-03
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Citations: View citations in EconPapers (1)

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Working Paper: A Sovereign Debt Model with Trade Credit and Reserves (2006)
Working Paper: A Sovereign Debt Model with Trade Credit and Reserves (2006)
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