Asymmetric Information and Sovereign Debt Disclosure

CAEPR WORKING PAPER SERIES (2022-004)

33 Pages Posted: 28 Mar 2022

See all articles by Bulent Guler

Bulent Guler

Indiana University

Yasin Kürşat Önder

Ghent University - Department of Economics

Temel Taskin

Bank of Canada

Date Written: March 2, 2022

Abstract

This paper studies sovereign debt and default dynamics under alternative disclosure arrangements in a sovereign default model incorporated with asymmetric information and long-term debt. Government is assumed to have access to both international bond financing and non-Paris club lending (a hidden and collateralized debt). Our results show that with a shift from partial disclosure to full disclosure regime governments can borrow at more favorable terms conditional on the same levels of debt and income. However, due to lack of commitment, favorable bond prices encourage governments to borrow more and experience higher default rates in the long-run equilibrium of the full disclosure regime. As a result, the switch from partial disclosure to full disclosure generates small welfare losses contrary to conventional wisdom.

Keywords: Hidden debt, Sovereign debt, Sovereign default, Collateralized debt, Asym-metric information, Debt disclosure

JEL Classification: E31, F34, F45.

Suggested Citation

Guler, Bulent and Onder, Yasin and Taskin, Temel, Asymmetric Information and Sovereign Debt Disclosure (March 2, 2022). CAEPR WORKING PAPER SERIES (2022-004), Available at SSRN: https://ssrn.com/abstract=4048040 or http://dx.doi.org/10.2139/ssrn.4048040

Bulent Guler (Contact Author)

Indiana University

Yasin Onder

Ghent University - Department of Economics ( email )

Belgium

Temel Taskin

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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