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Reputation and Sovereign Default
This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government?s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country?s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by ...