Abstract
A common view of sovereign debt markets is that they are prone to multiple equilibria. We prove that, to the contrary, Markov perfect equilibrium is unique in the widely studied model of Eaton and Gersovitz (1981), and we discuss multiple extensions and limitations of this finding. Our results show that no improvement in a borrower׳s reputation for repayment can be self-sustaining, thereby strengthening the Bulow and Rogoff (1989) argument that debt cannot be sustained by reputation alone.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 134-146 |
| Number of pages | 13 |
| Journal | Journal of Monetary Economics |
| Volume | 84 |
| DOIs | |
| State | Published - Dec 1 2016 |
Funding
We thank Ivan Werning for inspiration, continued encouragement and many useful suggestions. We also thank Ricardo Reis (the editor), three anonymous referees, as well as Daron Acemoglu, Marios Angeletos, Fernando Broner, Daniel Green, Pooya Molavi, Juan Passadore, Jonathan Parker, Alp Simsek, Olivier Wang and Yu Xu for helpful comments. Remaining errors are our own. Adrien Auclert gratefully acknowledges financial support from the Macro-Financial Modeling group and the hospitality of Princeton University during part of this research. Matthew Rognlie gratefully acknowledges financial support from the NSF Graduate Research Fellowship program.
Keywords
- Default
- Multiple equilibria
- Sovereign debt
ASJC Scopus subject areas
- Finance
- Economics and Econometrics