Journal of Political Economy Vol. 131 No. 11 2023
Information Frictions, Reputation, and Sovereign Spreads
Abstract
We formulate a reputational model in which the type of government is time varying and private information. Agents adjust their beliefs about the government’s type (i.e., reputation) using noisy signals about its policies. We consider a debt repayment setting in which reputation influences the market’s perceived probability of default, which affects sovereign spreads. We focus on the 2007–12 Argentine episode of inflation misreport to quantify how markets price reputation. We find that the misreports significantly increased Argentina’s sovereign spreads. We use those estimates to discipline our model and show that reputation can have long-lasting effects on a government’s borrowing costs.
- DOI
- 10.1086/724855
- Volume
- 131
- Issue
- 11
- Pages
- 3066-3102
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref