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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 ...
Rational Inattention via Ignorance Equivalence
We present a novel approach to finite Rational Inattention (RI) models basedon the ignorance equivalent, a fictitious action with state-dependent payoffsthat effectively summarizes the optimal learning and conditional choices. Theignorance equivalent allows us to recast the RI problem as a standard expectedutility maximization over an augmented choice set called the learning-proofmenu, yielding new insights regarding the behavioral implications of RI, inparticular as new actions are added to the menu. Our geometric approach isalso well suited to numerical methods, outperforming existing ...
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 ...