Private International Debt with Risk of Repudiation

Karsten Jeske
Working Paper 2001-16a
Revised July 2005

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The risk of repudiation plays a central role in the size and nature of international capital flows. In this paper the author addresses the question of whether, in a world of international capital flows with risk of default, strategic externalities provide a rationale for regulation of international borrowing. The author models centralized arrangements of international debt in which only governments borrow and lend internationally and decentralized arrangements in which individuals have access to international markets. The author shows that a centralized setup allows more international risk sharing than a decentralized setup.

JEL classification: F34, F41

Key words: foreign debt, risk of default, capital controls

The author thanks Andrew Atkeson, Timothy Kehoe, Dirk Krueger, and Edward Prescott for helpful comments. The views expressed here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author’s responsibility.

Please address questions regarding content to Karsten Jeske, Research Economist and Assistant Policy Adviser, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8825, 404-498-8814 (fax),