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Prudent sovereign debt borrowing

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  • Christopher Bliss

Abstract

A sovereign borrower is modelled as a rational calculator choosing levels of investment, consumption, and borrowing to maximize the expected level of a valuation function. The borrowing nation knows that it may opt to default on its debt. The lenders understand this and price their loans to fully compensate for the risk of default. A boundary defines a set of states below which the default option will be exercised. Close to that boundary both consumption and investment are suppressed. The influence of the cost of default is most clear via its effects on the marginal valuations of consumption and investment.

Suggested Citation

  • Christopher Bliss, 2018. "Prudent sovereign debt borrowing," Oxford Economic Papers, Oxford University Press, vol. 70(4), pages 1136-1147.
    • Handle: RePEc:oup:oxecpp:v:70:y:2018:i:4:p:1136-1147.
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    File URL: http://hdl.handle.net/10.1093/oep/gpy017
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises

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