A contraction for sovereign debt models

Mark A. Aguiar, Manuel Amador

Research output: Contribution to journalArticle

Abstract

Using a dual representation, we show that the Markov equilibria of the one-period-bond Eaton and Gersovitz (1981) incomplete markets sovereign debt model can be represented as a fixed point of a contraction mapping, providing a new proof of the uniqueness and existence of equilibrium in the benchmark sovereign debt model. The arguments can be extended to incorporate re-entry probabilities after default when the shock process is iid. Our representation of the equilibrium bears many similarities to an optimal contracting problem. We use this to argue that commitment to budget rules has no value to a benevolent government. We show how the introduction of long-term bonds breaks the link to the constrained planning problem.

Original languageEnglish (US)
Pages (from-to)842-875
Number of pages34
JournalJournal of Economic Theory
Volume183
DOIs
StatePublished - Sep 1 2019

Fingerprint

Sovereign debt
Contraction
Existence of equilibrium
Contracting
Benchmark
Uniqueness
Reentry
Contraction mapping
Incomplete markets
Markov equilibrium
Fixed point
Government
Planning

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Eaton-Gersovitz
  • Existence of equilibria
  • One period bonds
  • Sovereign debt
  • Time-consistency
  • Uniqueness of equilibria

Cite this

Aguiar, Mark A. ; Amador, Manuel. / A contraction for sovereign debt models. In: Journal of Economic Theory. 2019 ; Vol. 183. pp. 842-875.
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A contraction for sovereign debt models. / Aguiar, Mark A.; Amador, Manuel.

In: Journal of Economic Theory, Vol. 183, 01.09.2019, p. 842-875.

Research output: Contribution to journalArticle

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