NOMINAL SOVEREIGN DEBT |
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| Authors: | Toan Phan |
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| Affiliation: | University of North Carolina at Chapel Hill, U.S.A., and Federal Reserve Bank of Richmond, U.S.A.I am grateful for the support and suggestions from Martin Eichenbaum, Larry Christiano, Matthias Doepke, Alessandro Pavan, Eddie Dekel, and Mirko Wiederholt. I also thank Arvind Krishnamurthy, Kiminori Matsuyama, Sergio Rebelo, and various seminar participants for helpful comments. Last but not least, I thank the editor Harold Cole and two anonymous referees for useful comments and suggestions. The views expressed herein are those of the author and not those of the Federal Reserve Bank of Richmond or the Federal Reserve System. Please address correspondence to: Toan Phan, Department of Economics, University of North Carolina at Chapel Hill, NC 27599, or Federal Reserve Bank of Richmond, Richmond, VA 23219. E‐mail: . |
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| Abstract: | I show that reputation alone can sustain nominal sovereign debt, which is subject to both the risks of default and opportunistic devaluations. Nominal debt combined with a countercyclical exchange rate policy allows more hedging against shocks than real savings if markets are incomplete. Thus, the loss of either repayment or monetary reputation severely affects the government's ability to smooth consumption. The model offers a simple explanation for the Bulow and Rogoff critique, while simultaneously helping explain the issuance of nominal sovereign bonds by emerging economies. The model also helps explain why many governments borrow and save at the same time. |
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