Debt resolution processes for sovereign debt: Current policy issues

Abstract

Consider a two-period situation. In the first period a consumer and a firm bargain over the price of a bond. The objective is a project which takes one period to come on stream. Both agents prefer production but the consumer is less patient than the firm. The outcome is underproduction. A condition for the intervention of a bank exists. It is shown that intermediation is unstable. The potentially stabilising role of money is discussed.