NOMINAL SOVEREIGN DEBT, RISK SHIFTING, AND REPUTATION

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