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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Selective Sovereign Defaults
Aitor Erce
Enrico Mallucci
Abstract

Governments issue debt both domestically and abroad. This heterogeneity introduces the possibility for governments to operate selective defaults that discriminate across investors. Using a novel dataset on the legal jurisdiction of sovereign defaults that distinguishes between defaults under domestic law and default under foreign law, we show that selectiveness is the norm and that imports, credit, and output dynamics are different around different types of default. Domestic defaults are associated with contractions of credit and are more likely in countries with smaller credit markets. In turn, external defaults, are associated with a sharp contraction of imports and are more likely in countries with depressed import markets. Based on these regularities, we construct a dynamic stochastic general equilibrium model that we calibrate to Argentina. We show that the model replicates well the behavior of the Argentinean economy and rationalizes these empirical findings.


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Aitor Erce & Enrico Mallucci, Selective Sovereign Defaults, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1239, Nov 2018.
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Keywords: Sovereign Default ; Selective Defaults ; Domestic Debt ; External Debt ; Credit ; Imports
DOI: 10.17016/IFDP.2018.1239
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