CONSTITUTIONAL RULES, REPUTATION, AND SOVEREIGN DEBT

The inability of governments to pre-commit to certain policies often r esults in Pareto-inefficient equilibria. A policy is not time-consiste nt if it requires a course of action that will subsequently become und esirable. This paper examines the possibility of creating constitution al rules which can support sovereign debt contracts which would otherw ise violate the requirement of time-consistency. The possibility of es tablishing international reputation with internal enforcement mechanis ms is sensitive to the constitutional environment, which will also det ermine the appropriate form of the constitutional rules.