Reputation and Sovereign Default

Amador, Manuel; Phelan, Christopher

doi:10.3982/ecta16685

Cited by 18 publications

(6 citation statements)

References 43 publications

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“…This moment is significantly lower in the model at 18.49%. The issue of serial defaults has been documented in the literature and recently there has been an effort to model this behavior using reputation, Amador and Phelan (2021), and quantified in Fourakis (2022). As a result, here I do not place emphasis in matching this moment and subsequently in quantifying its increase with the no lending into arrears policy.…”

Section: Sovereign Debtmentioning

confidence: 99%

IMF lending in sovereign default

Stefanidis

2023

Macroecon. Dynam.

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This paper proposes that an International Monetary Fund (IMF) policy shift was the reason behind major changes in sovereign debt negotiation outcomes observed in 1989. The new policy, in marked departure from past policy, allowed the IMF to lend to nations in default. The paper highlights the stark improvements in debt forgiveness and post-negotiation debt servicing ability coincident with the IMF policy shift. A theoretical framework is proposed in which the IMF policy shift causes the observed changes in negotiation outcomes. The model highlights the policy’s potential to improve a country’s outside option during negotiations of defaulted debt. In the model, this improvement leads to increased debt forgiveness which in turn leads to less post-negotiation debt servicing difficulties. The model is then used to address an important question regarding the nature of post-negotiation default risk. The case is made that countries face persistent, rather than temporary, default risk after such negotiations. To avert such risk, they moderate their borrowing.

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Section: Sovereign Debtmentioning

confidence: 99%

IMF lending in sovereign default

Stefanidis

2023

Macroecon. Dynam.

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“…We view our contribution as being, first and foremost, to the literature on the political economy of sovereign default. Two strands stand out, one focused on sovereign reputation (Amador and Phelan (2021), Fourakis (2023), Morelli and Moretti (2023)), and another on political risk Hatchondo et al (2009), Hatchondo and Martinez (2010), Scholl (2017), Chatterjee and Eyigungor (2019), Cotoc et al (2021)). While our model draws from both strands, it is firmly in the latter category.…”

Section: Introductionmentioning

confidence: 99%

Tax Revolts and Sovereign Defaults

Arce,

Morgan,

Werquin

2024

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Protests and fiscal crises often coincide, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina during the Macri administration (2015-2019). In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal policies of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises concurrent with fiscal turmoil. We find that left-leaning parties are more prone to default, while right-leaning parties sustain higher debt levels. Revolts impact default risk through two channels. First, political crises can increase sovereign risk by facilitating transitions from right-wing to left-wing administrations that culminate in default. Second, the threat of frequent revolts during default periods can deter the government and increase commitment. In our calibration, the latter channel dominates the former with revolts operating as an endogenous default cost. Relative to a model without revolts, our framework can sustain higher levels of debt and reduce the frequency of defaults.

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“…Our reputational environment, where everyone optimizes but people have hidden knowledge about their preferences, is closely linked to repeated games with incomplete information (see Peski (2014) for a discussion of this literature). Reputation in debt markets in which one player is a commitment type has been recently studied by Amador and Phelan (2021). The fact that reputation in one market may discipline behavior in another market has been considered in Cole and Kehoe (1998), Chatterjee, Corbae, and Ríos‐Rull (2008), Corbae and Glover (2018), and Braxton, Herkenhoff, and Phillips (2020).…”

Section: Introductionmentioning

confidence: 99%

A Quantitative Theory of the Credit Score

Chatterjee,

Corbae,

Dempsey

et al. 2023

ECTA

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What is the role of credit scores in credit markets? We argue that it is, in part, the market's assessment of a person's unobservable type, which here we take to be patience. We postulate a model of persistent hidden types where observable actions shape the public assessment of a person's type via Bayesian updating. We show how dynamic reputation can incentivize repayment. Importantly, we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individuals' credit scores. We conduct counterfactuals to assess how more or less information used in scoring individuals affects outcomes and welfare. If tracking of individual credit actions is outlawed, poor young adults of low type benefit from subsidization by high types despite facing higher interest rates arising from lower dynamic incentives to repay.

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Reputation and Sovereign Default

Cited by 18 publications

References 43 publications

IMF lending in sovereign default

IMF lending in sovereign default

Tax Revolts and Sovereign Defaults

A Quantitative Theory of the Credit Score

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