Search Results
Working Paper
Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal
We revisit self-fulfilling rollover crises by introducing an alternative equilibrium selection that involves bond auctions at depressed but strictly positive equilibrium prices, a scenario in line with observed sovereign debt crises. We refer to these auctions as ?desperate deals?, the defining feature of which is a price schedule that makes the government indifferent to default or repayment. The government randomizes at the time of repayment, which we show can be implemented in pure strategies by introducing stochastic political payoffs or external bailouts. Quantitatively, auctions at ...
Working Paper
Rational Inattention via Ignorance Equivalence
We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming ...
Working Paper
Self-Fulfilling Debt Crises, Revisited
We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap in time (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show that the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed ...
Working Paper
Living in Infamy: Bad Reputations in Emerging Markets
We present a model of sovereign borrowing in the presence of default risk and asymmetric information. Optimizing sovereigns come in two persistent types with different levels of patience and hence different proclivities to default and borrow. In a stylized model, we construct a pooling equilibrium that is 'infamous' in the sense that the patient sovereign is constrained to borrow like the impatient sovereign on the equilibrium path. We argue that this provides an explanation for the observed lack of private capital markets for many low- and middle-income countries, and use the model to ...