Quarterly Review 2112
Reviving Reputation Models of International Debt
Patrick J. Kehoe
Harold L. Cole
A traditional explanation for why sovereign countries repay debt is that they want to keep a good reputation so they can easily borrow more. This explanation does not hold if a country has access to an adequate means of savings regardless of the country's past actions. With such access, a country gets only transient benefits from maintaining a good relationship with bankers, and such benefits cannot support borrowing. However, if a country is involved in a myriad of trust relationships, the country's reputation can spill over to a nondebt relationship which has enduring benefits. Such a spillover can allow a country's reputation to support a large amount of borrowing.
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