Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/197129
Authors: 
Bloise, Gaetano
Polemarchakis, Heraklis M.
Vailakis, Yiannis
Year of Publication: 
2017
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 12 [Year:] 2017 [Issue:] 3 [Pages:] 1121-1154
Abstract: 
We show that sovereign debt is unsustainable if debt contracts are not supported by direct sanctions and default carries only a ban from ever borrowing in financial markets even in the presence of uninsurable risks and time-varying interest rate. This extension of Bulow and Rogoff, 1989 requires that the present value of the endowment be finite under the most optimistic valuation. We provide examples where this condition fails and sovereign debt is sustained by the threat of loss of insurance opportunities upon default, despite the fact that the most pessimistic valuation of the endowment, the natural debt limit, is finite.
Subjects: 
Sovereign risk
Ponzi games
reputational debt
incomplete markets
JEL: 
F34
H63
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by-nc/4.0/
Document Type: 
Article

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