Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/189945
Authors: 
Di Casola, Paola
Sichlimiris, Spyridon
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 345
Abstract: 
Why do countries tend to repay their domestic and external debt, even though the legal enforcement of the sovereign debt contract is limited? Contrary to conventional wisdom, we argue that temporary market exclusion after default is costly. When the domestic financial market is characterized by a scarcity of private saving instruments, a government can partition its debt market into domestic and external segments, by restricting capital flows, to exploit its market power. The government's market power mitigates the problem of limited commitment, by making default a more costly option. Consequently, it extends the government's external debt capacity. We replicate the domestic and external sovereign debt for non-advanced economies, by unveiling their link to financial repression.
Subjects: 
sovereign debt
sovereign default
financial repression
financial development
capital controls
JEL: 
E21
E44
E60
F34
F38
G15
G18
H63
O16
Document Type: 
Working Paper

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