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Economic Theory

, Volume 64, Issue 4, pp 825–846 | Cite as

On the sovereign debt paradox

  • V. Filipe Martins-da-Rocha
  • Yiannis Vailakis
Research Article

Abstract

Bulow and Rogoff (Am Econ Rev 79(1):43–50, 1989) show that lending to small countries cannot be supported merely on the country’s “reputation for repayment” if exclusion from future credit markets is the only consequence of default. Their arguments are valid under fairly general conditions, but they do not go through when the output of the sovereign may vanish along a path of successive low productivity shocks, or when it may grow unboundedly along a path of successive high productivity shocks. We propose an alternative proof illustrating that their renowned sovereign debt paradox holds in full generality.

Keywords

Sovereign risk Lack of commitment Reputation debt 

JEL Classification

F34 H63 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  • V. Filipe Martins-da-Rocha
    • 1
    • 2
  • Yiannis Vailakis
    • 3
  1. 1.Sao Paulo School of EconomicsFGVSão PauloBrazil
  2. 2.UMR, CEREMADECNRS, Unversité Paris-Dauphine, PSL Research UniversityParisFrance
  3. 3.Adam Smith Business SchoolUniversity of GlasgowGlasgowScotland, UK

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