NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sovereign Debt and Consumption Smoothing

Herschel I. Grossman, Taejoon Han

NBER Working Paper No. 5997
Issued in April 1997
NBER Program(s):   EFG   ME

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.

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Published: Journal of Monetary Economics, Vol. 44, no. 1 (August 1999): 149-158.

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