NOMINAL SOVEREIGN DEBT, RISK SHIFTING, AND REPUTATION

This paper analyzes a reputational equilibrium in a model in which nominal sovereign debt serves to shift risk associated with the unpredictability of tax revenues from the sovereign to its lenders. The analysis answers the following set of related questions: Why would a sovereign refrain from inflating when faced with servicing a large quantity of nominal debt? If a sovereign does not plan to use inflation to repudiate its nominal debt, why would it want to issue such debt in the first place. What are the distinguishing features of those sovereigns who are willing and able to issue nominal debts.