Reputation and Partial Default

17 Pages Posted: 5 Jul 2021 Last revised: 25 Sep 2021

See all articles by Manuel Amador

Manuel Amador

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Christopher Phelan

University of Minnesota - Minneapolis

Date Written: July 2021

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.

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Suggested Citation

Amador, Manuel and Phelan, Christopher, Reputation and Partial Default (July 2021). NBER Working Paper No. w28997, Available at SSRN: https://ssrn.com/abstract=3880230

Manuel Amador (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Christopher Phelan

University of Minnesota - Minneapolis

420 Delaware St SE
Minneapolis, MN 55454
United States

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