Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Domestic Debt and Sovereign Defaults
This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings of government debt weaken investors' balance sheets and induce a contraction of credit and output upon default. I calibrate the model to the Argentinean economy and show that the model reproduces key empirical moments. Introducing domestic debt also yields relevant normative implications. While domestic debt is crucial to determining the risk of default, the efficient internal-external composition of debt cannot be achieved without government intervention. Pigouvian subsidies can restore efficiency.
Cite this item
Enrico Mallucci, Domestic Debt and Sovereign Defaults, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1153, 18 Dec 2015.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
Keywords: Sovereign Defaults; Domestic Debt; Debt Crises; Credit Market
This item with handle RePEc:fip:fedgif:1153
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