Reputation and Sovereign Default
TL;DR: In this paper, the authors present a continuous-time model of sovereign debt, where a relatively impatient sovereign government's hidden type switches back and forth between a commitment type which cannot default, and an opportunistic type which can, and where outside lenders have particular beliefs regarding how a committed type should borrow for any given level of debt and bond price.
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Abstract: This paper presents a continuous‐time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a commitment type, which cannot default, and an opportunistic type, which can, and where we assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. In any Markov equilibrium, the opportunistic type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. The equilibrium features a “graduation date”: a finite amount of time since the last default, after which time reputation reaches its highest level and is unaffected by not defaulting. Before such date, not defaulting always increases the country's reputation. For countries that have recently defaulted, bond prices and the total amount of debt are increasing functions of the amount of time since the country's last default. For countries that have not recently defaulted (i.e., those that have graduated), bond prices are constant.
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Reputation and Sovereign Default
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References
Reputation and imperfect information
David M. Kreps,Robert Wilson +1 more
TL;DR: The authors reexamine Selten's model, adding to it a small amount of imperfect (or incomplete) information about players' payoffs, and find that this addition is sufficient to give rise to the reputation effect that one intuitively expects.
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Predation, reputation, and entry deterrence☆
Paul Milgrom,John Roberts +1 more
TL;DR: In this paper, a gametheoretic, equilibrium analysis suggests that if a firm is threatened by several potential entrants, then predation may be rational against early entrants, even if it is costly when viewed in isolation, because it yields a reputation which deters other entrants.
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•Journal Article
Handbook of macroeconomics
TL;DR: A survey of the state of knowledge in the broad area that includes the theories and facts of economic growth and economic fluctuations, as well as the consequences of monetary and fiscal policies for general economic conditions can be found in this paper.
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Default Risk and Income Fluctuations in Emerging Economies
TL;DR: This article developed a small open economy model to study default risk and its interaction with output, consumption, and foreign debt, which predicts that default incentives and interest rates are higher in recessions, as observed in the data.