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A sovereign debt model with trade credit and reserves

By Emanuel Kohlscheen and Stephen A. O'Connell

Abstract

This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance

Topics: HJ
Publisher: University of Warwick, Department of Economics
Year: 2006
OAI identifier: oai:wrap.warwick.ac.uk:1452

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