Sovereign Debt without Default Penalties

Guembel, Alexander and Sussman, Oren (2009) Sovereign Debt without Default Penalties. Review of Economic Studies, 76 (4). pp. 1297-1320.


We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding (a) the role of financial intermediaries in sovereign lending, (b) the effect of capital flows on price volatility including the possible overvaluation of debt to the point that the median voter is priced out of the market, and (c) debt restructuring where creditors are highly dispersed.

Item Type: Article
Keywords: Sovereign debt restructuring; Debt crisis; Median voter; Political economy; finance
Subject(s): Finance
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Date Deposited: 18 Feb 2012 20:51
Last Modified: 21 Sep 2018 08:35
Funders: N/A

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