Creator: Atkeson, Andrew Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 381 Abstract:
This paper examines the optimal debt contract between lenders and a sovereign borrower when the borrower is free to repudiate the debt and when his decision to invest or consume borrowed funds is unobservable. We show that recurrent debt crises are a necessary part of the incentive structure which supports the optimal pattern of lending.
Keyword: Debt crisis, Optimal debt contract, Credit market, Moral hazard, International capital, International debt, International loans, Foreign lending, and Risk Subject (JEL): F34 - International Lending and Debt Problems