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Information, Insurance and the Sustainability of Sovereign Debt

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  • Toan Phan

    (University of North Carolina Chapel Hill)

Abstract

In an influential paper, Bulow and Rogoff (1989) prove that in a competitive financial market, the threat of credit exclusion alone cannot sustain repayment of sovereign debt, as the defaulting government can still enter cash-in-advance insurance contracts. However, their result relies on an important assumption: symmetric information. This paper shows that if a debtor government has some private information about the underlying distribution of future economic shocks, then debt repayment is sustainable. This is true even if there is only one period with private information, and even if default does not have a spillover effect to any other relationship. The intuition is that a default is a signal of a bad distribution of future shocks, leading to higher risk premia on future financial contracts. (Copyright: Elsevier)

Suggested Citation

  • Toan Phan, 2016. "Information, Insurance and the Sustainability of Sovereign Debt," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 93-108, October.
    • Handle: RePEc:red:issued:15-136
    DOI: 10.1016/j.red.2016.06.006
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    References listed on IDEAS

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    Cited by:

    1. Phan, Toan, 2017. "Sovereign debt signals," Journal of International Economics, Elsevier, vol. 104(C), pages 157-165.
    2. Toan Phan & Felipe Schwartzman, 2023. "Climate Defaults and Financial Adaptation," Working Paper 23-06, Federal Reserve Bank of Richmond.
    3. Phan, Toan, 2017. "A model of sovereign debt with private information," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 1-17.

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    More about this item

    Keywords

    Sovereign debt; insurance; asymmetric information;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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