Sovereign Debt and Consumption Smoothing
Herschel I. Grossman
The Sejong Institute; Brown University - Department of Economics
NBER Working Paper No. w5997
This paper shows that whether or not a sovereign can borrow to smooth consumption depends both on how consumption smoothing is achieved, whether by contingent debt issuance or by contingent debt servicing, and on the exact nature of the penalty for debt repudiation. If a sovereign that repudiated its debt could not borrow again, but could continue to save and to dissave, then contingent debt issuance, without contingent debt servicing, cannot support a positive amount of uncollateralized sovereign debt. But, under this same specification of the penalty for repudiation, contingent debt servicing supports a positive amount of uncollateralized sovereign debt.
Number of Pages in PDF File: 12working papers series
Date posted: July 10, 2000
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