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Sovereign debt and incentives to default with uninsurable risks
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Bloise, Gaetano, Polemarchakis, H. M. and Vailakis, Yiannis (2017) Sovereign debt and incentives to default with uninsurable risks. Theoretical Economics, 12 (3). pp. 1121-1154. doi:10.3982/TE2146
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Official URL: http://doi.org/10.3982/TE2146
Abstract
We show that sovereign debt is unsustainable if debt contracts are not supported by direct sanctions and default carries only a ban from ever borrowing in financial markets even in the presence of uninsurable risks and time-varying interest rate. This extension of Bulow and Rogoff (1989) requires that the present value of the endowment be finite under the most optimistic valuation. We provide examples where this condition fails and sovereign debt is sustained by the threat of loss of insurance opportunities upon default, despite the fact that the most pessimistic valuation of the endowment, the natural debt limit, is finite.
| Item Type: | Journal Article | ||||||
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| Subjects: | H Social Sciences > HJ Public Finance | ||||||
| Divisions: | Faculty of Social Sciences > Economics | ||||||
| Library of Congress Subject Headings (LCSH): | Debts, Public -- Mathematical models, Ponzi schemes | ||||||
| Journal or Publication Title: | Theoretical Economics | ||||||
| Publisher: | Econometric Society | ||||||
| ISSN: | 1933-6837 | ||||||
| Official Date: | 22 September 2017 | ||||||
| Dates: |
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| Volume: | 12 | ||||||
| Number: | 3 | ||||||
| Page Range: | pp. 1121-1154 | ||||||
| DOI: | 10.3982/TE2146 | ||||||
| Status: | Peer Reviewed | ||||||
| Publication Status: | Published | ||||||
| Access rights to Published version: | Open Access | ||||||
| Funder: | Italy. Ministero dell'educazione nazionale, Seventh Framework Programme (European Commission) (FP7), France. Agence nationale de la recherche (ANR) | ||||||
| Grant number: | PRIN2010-2012 (Italy. Ministero dell'educazione nazionale), Project 240983 DCFM (FP7), Projects Novo Tempus and FIRE (ANR) |
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