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Working Paper
A seniority arrangement for sovereign debt
Eyigungor, Burcu; Chatterjee, Satyajit (2015-01-31)
A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the ?absolute priority" or ?first-in-time" rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications ...
Working Papers , Paper 15-7

Working Paper
Fiscal Stimulus under Sovereign Risk
Presno, Ignacio; Ottonello, Pablo; Bianchi, Javier (2019-09-12)
The excess procyclicality of fiscal policy is commonly viewed as a central malaise in emerging economies. We document that procyclicality is more pervasive in countries with higher sovereign risk and provide a model of optimal fiscal policy with nominal rigidities and endogenous sovereign default that can account for this empirical pattern. Financing a fiscal stimulus is costly for risky countries and can render countercyclical policies undesirable, even in the presence of large Keynesian stabilization gains. We also show that imposing austerity can backfire by exacerbating the exposure to ...
Working Papers , Paper 762

Working Paper
Self-Fulfilling Debt Crises with Long Stagnations
Teles, Pedro; Navarro, Gaston; Nicolini, Juan Pablo; Ayres, Joao Luiz (2019-04-18)
We explore quantitatively the possibility of multiple equilibria in a model of sovereign debt crises. The source of multiplicity is the one identified by Calvo (1988). This type of multiplicity has been at the heart of the policy debate through the recent European sovereign debt crisis. Key for multiplicity in the model is a stochastic process for output featuring long periods of either high or low growth. We calibrate the output process in the model using data for the southern European countries that were exposed to the debt crisis. We find that expectations-driven sovereign debt crises are ...
Working Papers , Paper 757

Working Paper
Self-Fulfilling Debt Crises with Long Stagnations
Ayres, Joao; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro (2023-02-14)
We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the Southern European crisis of the early 2010’s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Key for multiplicity is an output process featuring long periods of either high growth or stagnation that we estimate using data for those countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they only occur during stagnations. Expectations are a major driver explaining default rates and credit spread ...
International Finance Discussion Papers , Paper 1370

Working Paper
Banking Regulation with Risk of Sovereign Default
Schoors, Koen; Livshits, Igor; D'Erasmo, Pablo (2019-02-22)
Banking regulation routinely designates some assets as safe and thus does not require banks to hold any additional capital to protect against losses from these assets. A typical such safe asset is domestic government debt. There are numerous examples of banking regulation treating domestic government bonds as ?safe,? even when there is clear risk of default on these bonds. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt allows (and induces) domestic banks to ?gamble? with depositors? funds by purchasing risky government bonds (and assets ...
Working Papers , Paper 19-15

Working Paper
Efficient Computation with Taste Shocks
Gordon, Grey (2019-09-11)
Taste shocks result in nondegenerate choice probabilities, smooth policy functions, continuous demand correspondences, and reduced computational errors. They also cause significant computational cost when the number of choices is large. However, I show that, in many economic models, a numerically equivalent approximation may be obtained extremely efficiently. If the objective function has increasing differences (a condition closely tied to policy function monotonicity) or is concave in a discrete sense, the proposed algorithms are O(n log n) for n states and n choice--a drastic improvement ...
Working Paper , Paper 19-15

Working Paper
Tax Revolts and Sovereign Defaults
Arce, Fernando; Werquin, Nicolas; Morgan, Jan (2024-02)
Protests and fiscal crises often coincide, with complex causal dynamics at play. We examine the interaction between tax revolts and sovereign risk using a quantitative structural model calibrated to Argentina during the Macri administration (2015-2019). In the model, the government can be controlled by political parties with different preferences for redistribution. Households may opt to revolt in response to the fiscal policies of the ruler. While revolts entail economic costs, they also increase the likelihood of political turnover. Our model mirrors the data by generating political crises ...
Working Paper Series , Paper WP 2024-07

Report
Renegotiation Policies in Sovereign Defaults
Bai, Yan; Arellano, Cristina (2014-01-10)
This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing ...
Staff Report , Paper 495

Working Paper
Relationship Networks in Banking Around a Sovereign Default and Currency Crisis
Sangiacomo, Maximo; D'Erasmo, Pablo; Pia Olivero, Maria; Moscoso Boedo, Herman J. (2019-10-29)
We study how banks? exposure to a sovereign crisis gets transmitted onto the corporate sector. To do so we use data on the universe of banks and ?rms in Argentina during the crisis of 2001. We build a model characterized by matching frictions in which ?rms establish (long-term) relationships with banks that are subject to balance sheet disruptions. Credit relationships with banks more exposed to the crisis su?er the most. However, this relationship-level e?ect overstates the true cost of the crisis since profitable ?rms (e.g., exporters after a devaluation) might ?nd it optimal to switch ...
Working Papers , Paper 19-43

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