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Credibility For Sale

Author

Listed:
  • Dirk Niepelt

    (Gerzensee; U Bern; IIES, Stockholm U)

  • Harris Dellas

    (University of Bern)

Abstract

We develop a model with official and private creditors where the probability of sovereign default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay but also carries extra costs such as reduced ex post flexibility. We characterize the equilibrium composition of debt across creditor groups. Our model can account for important features of sovereign debt crises: Namely, that official lending to sovereigns takes place only in times of debt distress, carries a favorable rate and tends to displace private funding. It also offers a novel perspective on the relationship between debt overhang and default risk: The availability of official debt makes default on outstanding debt more likely.

Suggested Citation

  • Dirk Niepelt & Harris Dellas, 2013. "Credibility For Sale," 2013 Meeting Papers 12, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:12
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    References listed on IDEAS

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    Cited by:

    1. Dellas, Harris & Niepelt, Dirk, 2016. "Sovereign debt with heterogeneous creditors," Journal of International Economics, Elsevier, vol. 99(S1), pages 16-26.
    2. Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2016. "The effectiveness of the ECB's asset purchase programs of 2009 to 2012," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 45-57.
    3. Hatchondo, Juan Carlos & Martinez, Leonardo & Onder, Yasin Kursat, 2017. "Non-defaultable debt and sovereign risk," Journal of International Economics, Elsevier, vol. 105(C), pages 217-229.

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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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