Sovereign Debt Without Default Penalties
Review of Economic Studies, 2009, vol. 76, pp. 1297-1320.
32 Pages Posted: 28 Feb 2006 Last revised: 8 Dec 2012
Date Written: December 7, 2012
We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding a) the role of financial intermediaries in sovereign lending; b) the effect of capital flows on price volatility including the possible over-valuation of debt to the point that the median voter is priced out of the market; and c) debt restructuring where creditors are highly dispersed.
Keywords: Sovereign debt restructuring, debt crisis, median voter, political economy
JEL Classification: D72, F34, G15
Suggested Citation: Suggested Citation