Sovereign Debt as a Contingent Claim:  Excusable Default, Repudiation,  and Reputation

Grossman, Herschel I.; Huyck, John B. Van

doi:10.3386/w1673

Cited by 229 publications

(300 citation statements)

References 6 publications

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“…Maintaining the bimetallic ratio fixed is a variant of the basic convertibility rule, since it is the fixed value of the unit of account that is the essence of the rule. 4 The gold standard rule in the century before World War I can be viewed as a contingent rule, or a rule with escape clauses (Grossman and Van Huyck, 1988;DeKock and Grilli, 1989;Flood and Isard, 1989;Bordo and Kydland, 1995). The monetary authority maintains the standard --keeps the price of the currency in terms of gold fixed --except in the event of a well understood emergency such as a major war.…”

Section: The Gold Standard As a Commitment Mechanismmentioning

confidence: 99%

The Gold Standard as a “Good Housekeeping Seal of Approval”

1996

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe Gold Standard as a `Good Housekeeping Seal of Approval'In this paper we argue that adherence to the gold standard rule of convertibility of national currencies into a fixed weight of gold served as `a good housekeeping seal of approval' which facilitated access by peripheral countries to foreign capital from the core countries of western Europe. We survey the historical background of gold standard adherence in the period 1870-1914 by nine important peripheral countries. The sample includes the full range of commitment to the gold standard from continuous adherence, through intermittent adherence, to non-adherence. Evidence on the pattern of long-term government bond yields suggests that longterm commitment to the gold standard mattered even when bonds were denominated in gold:countries that remained on gold throughout the classical era were charged lower rates than countries that had a mixed record of adherence. Estimation of a CAPM model, using the differential between peripheral country rates and UK rates augmented by a list of `fundamentals,' and a dummy variable to capture gold standard adherence, reveals that capital markets attached significant weight to gold standard adherence. Countries with poor adherence records were charged considerably more than those with good records, enough to explain the determined effort to stay on gold made by a number of capital importing countries.

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Section: The Gold Standard As a Commitment Mechanismmentioning

confidence: 99%

The Gold Standard as a “Good Housekeeping Seal of Approval”

1996

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“…18 Grossman and Van Huyck (1988) developed a model whereby, consistent with the first two "facts," sovereign defaults occur as bad outcomes of debt-servicing obligations that are implicitly contingent on the realized state of the world. 19 They maintain that lenders sharply differentiate excusable defaults that are justifiable when associated with implicitly understood contingencies from debt repudiation, which is deemed inexcusable.…”

Section: Understanding Sovereign Debt Maturity and Indexation As A mentioning

confidence: 99%

“…We then review the main policy proposals related to these topics and advance some implications derived from our work. In Alfaro and Kanczuk (2005 a, b, c), we modeled sovereign debt as a contingent claim following the framework proposed by Grossman and Van Huyck (1988). Consistent with the stylized facts of sovereign borrowing, these authors developed a model in which sovereign defaults occur as bad outcomes of debtservicing obligations that are implicitly contingent on the realized state of the world.…”

Section: Introductionmentioning

confidence: 99%

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Sovereign Debt: Indexation and Maturity

Alfaro

Kanczuk

2006

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. This paper may be freely reproduced provided credit is given to the Research Department, InterAmerican Development Bank. Terms of use: Documents inThe Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res. 3 Abstract * *In this paper we review the literature on sovereign debt with particular emphasis on indexation and maturity and the main policy proposals related to these topics. We also advance some implications derived from our work. In Alfaro and Kanczuk (2005a, b, c), we modeled sovereign debt as a contingent claim following the framework developed by Grossman and Van Huyck (1988). Our framework, however, recognizes that contingent debt might be associated with incentive problems. Applying this framework to the study of the sustainability of sovereign debt, the tradeoff between nominal and indexed debt, and the optimal debt maturity, we find some of the proposals advanced in the literature regarding lengthening debt maturity and issuing nominal debt to be unsustainable in emerging (volatile) economies.JEL classification: E6, E62, F34, F37, H63.

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“…Thus when default is prevalent within a country's local network, default at -! home may be "excusable" (Grossman and Huyck 1988) in that it can be attributed to adverse…”

Section: Network Interdependence and Defaultmentioning

confidence: 99%

Networked Default: Public Debt, Trade Embeddedness, and Partisan Survival in Democracies Since 1870

2014

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Sovereign default is often associated with the downfall of incumbent governments in democratic polities. Existing scholarship directs attention to the relationship between default and domestic politics and institutions rather than the broader international environment wherein repayment and default take place. We explore the possibility that the impact of a country's decision to default on partisan survival will also be shaped by the prevalence of default amongst its peers in its local network. Illustrating this line of reasoning with international trade, our results support the argument that given networked default, voters see national default as a lost strategic opportunity to elevate a country's reputation and are more inclined to punish incumbent regimes who fail to repay. These results are inconsistent with an alternative possibility -that networked default might contribute to the decay of a repayment norm and thus provide a justifiable "excuse" for default at home. Furthermore, our results are robust to alternative measures of regime governance and entropy balancing in light of systematic differences between defaulting and non-defaulting regimes. Overall, our findings point to the political interdependence of default and repayment and the need for political scientists to take greater account of network effects in analyzing the consequences of economic misbehavior. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. Sovereign default is often associated with the downfall of incumbent governments in democratic polities. Existing scholarship directs attention to the relationship between default and domestic politics and institutions rather than the broader international environment wherein repayment and default take place. We explore the possibility that the impact of a country's decision to default on partisan survival will also be shaped by the prevalence of default amongst its peers in its local network. Illustrating this line of reasoning with international trade, our results support the argument that given networked default, voters see national default as a lost strategic opportunity to elevate a country's reputation and are more inclined to punish incumbent regimes who fail to repay. These results are inconsistent with an alternative possibility -that networked default might contribute to the decay of a repayment norm and thus provide a justifiable "excuse" for default at home. Furthermore, our results are robust to alternative measures of regime governance and entropy balancing in light of systematic differences between defaulting and non-defaulting regimes. Overall, our findings point to the political interdependence of default and ...

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Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation

Cited by 229 publications

References 6 publications

The Gold Standard as a “Good Housekeeping Seal of Approval”

The Gold Standard as a “Good Housekeeping Seal of Approval”

Sovereign Debt: Indexation and Maturity

Networked Default: Public Debt, Trade Embeddedness, and Partisan Survival in Democracies Since 1870

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