Sovereign Debt as Intertemporal Barter

Abstract

Borrowing and lending between sovereign parties is modelled as intertemporal barter that smooths the consumption of a risk-averse party subject to endowment shocks. The surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties, including any other competitive lenders who may be potential entrants. The sole punishments consist of renegotiation-proof changes in the paths of future payments. This implicit long-term relationship may be fulfilled as the continual renegotiation of a simple, incomplete short-term debt contract with associated "debt overhang." The analysis suggests that the crucial role of the explicit contract is the identification of the parties to the relationship.

Sovereign default and debt renegotiation

“…Cole and Kehoe (1998), Kletzer and Wright (2000), Wright (2002), andAmador (2003) analyze various ways to reduce the range of a defaulting country's saving mechanism, so that a reputation model can generate positive international lending. endowment, 0 ≤  ≤ 1.…”

Sovereign Theft: Theory and Evidence about Sovereign Default and Expropriation

“…As Kletzer and Wright (2000) show, limits on the ability of …nancial institutions in creditor countries 6 to guarantee repayment can restore the threat of exclusion. Wright (2001) …nds conditions under which even competitive …nancial institutions (in the sense of making zero pro…ts in equilibrium) can coordinate to exclude a defaulter from access to all capital markets.…”

A duality approach to continuous-time contracting problems with limited commitment

“…We study the link between the dual and primal problems and establish the weak and strong 1 Other examples include applications to wage contracts by Thomas and Worrall (1988), sovereign debt by Bulow and Rogoff (1989), Kletzer and Wright (2000), and Hellwig and Lorenzoni (2009), asset markets by Kehoe and Levine (1993) and Jermann (2000, 2001), optimal taxation by Chari and Kehoe (1993), business cycles by Cooley, Marimon, and Quadrini (2004), international business cycles by Kehoe and Perri (2002), consumption inequality by Krueger and Uhlig (2006) and Krueger and Perri (2006), the welfare effects of a progressive tax by Krueger and Perri (2011), political economy by Acemoglu, Golosov, and Tsyvinski (2011), and asset bubbles by Kocherlakota (2008) and Wang (2011, 2012).…”