CONSTITUTIONAL RULES, REPUTATION, AND SOVEREIGN DEBT

The inability of governments to pre-commit to certain policies often results in Pareto-inefficient equilibria. A policy is not time-consistent if it requires a course of action that will subsequently become undesirable. This paper examines the possibility of creating constitutional rules which can support sovereign debt contracts which would otherwise violate the requirement of time-consistency. The possibility of establishing international reputation with internal enforcement mechanisms is sensitive to the constitutional environment, which will also determine the appropriate form of the constitutional rules.