Working Paper: NBER ID: w28997
Authors: Manuel Amador; Christopher Phelan
Abstract: This paper presents a continuous-time reputation model of sovereign debt allowing for both varying levels of partial default and full default. In it, a government can be a non-strategic commitment type, or a strategic opportunistic type, and a government's reputation is its equilibrium Bayesian posterior of being the commitment type. Our equilibrium has that for bond levels reachable by both types without defaulting, bigger partial defaults (or bigger haircuts for bond holders) imply higher interest rates for subsequent bond issuances, as in the data.
Keywords: No keywords provided
JEL Codes: F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| larger partial defaults or haircuts (G33) | higher interest rates (E43) |
| government type influences bond pricing (H74) | higher bond prices (G12) |
| opportunistic type's decision to mix between different haircut levels (C34) | increased interest rates (E43) |
| higher equilibrium probability of being a commitment type (C62) | higher bond prices (G12) |
| larger defaults (C55) | adverse reputation consequences (D82) |