Affiliation:
1. University of Minnesota, Federal Reserve Bank of Minneapolis, and NBER (email: )
Abstract
This paper presents a continuous-time reputation model of sovereign debt allowing for both varying levels of partial default and full default. In it, a government can be a nonstrategic commitment type or a strategic opportunistic type, and a government’s reputation is its equilibrium Bayesian posterior of being the commitment type. Our equilibrium has that for bond levels reachable by both types without defaulting, bigger partial defaults (or bigger haircuts for bond holders) imply higher interest rates for subsequent bond issuances, as in the data. (JEL D83, E32, E43, G12, H63)
Publisher
American Economic Association
Subject
Management, Monitoring, Policy and Law,Geography, Planning and Development