Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/109941
Authors: 
Guo, Yanling
Year of Publication: 
2015
Series/Report no.: 
Economics Discussion Papers 2015-30
Abstract: 
In this paper, the author considers the sovereign debt in the form of one-period government bonds with default risk, which can be purchased by and traded among domestic and foreign investors. She shows that the weight assigned to the lenders' interest by the borrowing government at the time of debt repayment, which captures the lenders' trust in the government's propensity to repay the debt and is denoted as », also determines the default risk: a higher » means a lower default risk ceteris paribus which leads to a lower risk premium, and vice versa. Since this relationship only holds in the "good equilibrium", the author further shows that the "good equilibrium" is the only stable equilibrium under some quite general assumptions while the "bad equilibrium" is an unstable one - a possible reason why in practice rather a negative correlation between » and the default risk as well as the corresponding risk premium is observed.
Subjects: 
Public debt
sovereign debt
sovereign default
domestic debt
external debt
fiscal policy
government bond
government borrowing
JEL: 
F34
H63
H74
H62
H6
H87
Creative Commons License: 
http://creativecommons.org/licenses/by/3.0/
Document Type: 
Working Paper

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