On the sovereign debt paradox

Martins-da-Rocha, V. Filipe; Vailakis, Yiannis

doi:10.1007/s00199-016-0971-6

Cited by 9 publications

(1 citation statement)

References 27 publications

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“…To clarify this point, we carry out the natural counterfactual experiment: we introduce elementary Arrow securities so as to complete markets while preserving prices of the risk‐free bond. In particular, we consider elementary Arrow securities with prices π in

{double-struckR}^{S \times S}

satisfying

q_{s} = π_{s s} + π_{s ŝ} .

Furthermore, among the several market values of Arrow securities consistent with the given bond prices, we choose those ensuring a finite present value of the borrower's future endowment, as required by Bulow and Rogoff (1989a) to rule out Ponzi‐type debt contracts (see also Martins‐da‐Rocha and Vailakis (2017)). Notice that the Perron–Frobenius theorem asserts that there exists a dominant root

λ > 0

such that, for some positive vector b in

{double-struckR}^{S}

λ (\begin{matrix} b_{h} \\ b_{l} \end{matrix}) = (\begin{matrix} π_{h h} & π_{h l} \\ π_{l h} & π_{l l} \end{matrix}) (\begin{matrix} b_{h} \\ b_{l} \end{matrix}) .

Thus, we select prices of elementary Arrow securities to guarantee that

λ < 1

, and this condition is equivalent to a finite valuation of the future endowment (see Appendix C).…”

Section: A Motivating Examplementioning

confidence: 99%

Sustainable debt

Bloise

Polemarchakis

Vailakis

2021

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We show that debt is sustainable at a competitive equilibrium based solely on the reputation for repayment; that is, even without collateral or legal sanctions available to creditors. In an incomplete asset market, when the rate of interest falls recurrently below the rate of growth of the economy, self‐insurance is more costly than borrowing, and repayments on loans are enforced by the implicit threat of loss of the risk‐sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money, and it is not valued as a speculative bubble. Competitive equilibria with self‐enforcing debt exist under a suitable hypothesis of gains from trade.

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{double-struckR}^{S \times S}

satisfying

q_{s} = π_{s s} + π_{s ŝ} .

λ > 0

such that, for some positive vector b in

{double-struckR}^{S}

λ (\begin{matrix} b_{h} \\ b_{l} \end{matrix}) = (\begin{matrix} π_{h h} & π_{h l} \\ π_{l h} & π_{l l} \end{matrix}) (\begin{matrix} b_{h} \\ b_{l} \end{matrix}) .

Thus, we select prices of elementary Arrow securities to guarantee that

λ < 1

, and this condition is equivalent to a finite valuation of the future endowment (see Appendix C).…”

Section: A Motivating Examplementioning

confidence: 99%

Sustainable debt

Bloise

Polemarchakis

Vailakis

2021

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Introduction to the Special Issue on Models of Debt and Debt Crises

2017

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This special issue contains 10 articles that develop models of debt and debt crises. Some articles address fundamental questions about the theory of debt: What assumptions are needed to support positive levels of sovereign debt in models where governments can default? Is there evidence in the data to justify these assumptions? Are market outcomes in models of debt constrained optimal, or are interventions by an outside authority justified? Other articles address the question of why governments find it so difficult to reduce levels of sovereign debt. Yet other articles address the question The authors of the articles in this special issue presented preliminary versions of their papers at the Symposium on Debt Crises held as part of the 13th Annual SAET Conference on Current Trends in Economics held at MINES ParisTech, July 22-27 2013. We are grateful to the graduate student members of the International Trade and Development Workshop at the University of Minnesota who did much of the editorial work for this volume:

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