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Keywords:Sovereign debt 

Journal Article
What We Learn from a Sovereign Debt Restructuring in France in 1721

A debt is a promise to perform a certain action (make a payment) in the future. A default is a failure to perform the action when the time comes to do so. If performance of the action were always in my interest, the promise to perform it would be superfluous. When we promise to do something, it is precisely because we may well not want to do it. Debt usually takes the form of a contract, which courts can enforce. But sovereign debt (debt issued by governments) is harder to enforce, because governments aren?t easily constrained by courts. How can sovereign governments make promises and be ...
Economic Perspectives , Issue 5 , Pages 1-17

Reputation and Sovereign Default

This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government?s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country?s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by ...
Staff Report , Paper 564

Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models

We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of ...
Staff Report , Paper 565

Deadly Debt Crises: COVID-19 in Emerging Markets

The COVID-19 epidemic in emerging markets risks a combined health, economic, and debt crisis. We integrate a standard epidemiology model into a sovereign default model and study how default risk impacts the ability of these countries to respond to the epidemic. Lockdown policies are useful for alleviating the health crisis but they carry large economic costs and can generate costly and prolonged debt crises. The possibility of lockdown induced debt crises in turn results in less aggressive lockdowns and a more severe health crisis. We find that the social value of debt relief can be ...
Staff Report , Paper 603

Is It Too Late to Bail Out the Troubled Countries in the Eurozone?

In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone ...
Staff Report , Paper 497

Working Paper
Domestic Policies and Sovereign Default

A model with two essential elements, sovereign default and distortionary fiscal and monetary policies, explains the interaction between sovereign debt, default risk and inflation in emerging countries. We derive conditions under which monetary policy is actively used to support fiscal policy and characterize the intertemporal tradeoffs that determine the choice of debt. We show that in response to adverse shocks to the terms of trade or productivity, governments reduce debt and deficits, and increase inflation and currency depreciation rates, matching the patterns observed in the data for ...
Working Papers , Paper 2020-017

Working Paper
Deconstructing Delays in Sovereign Debt Restructuring

Negotiations to restructure sovereign debt are time consuming, taking almost a decade on average to resolve. In this paper, we analyze a class of widely used complete information models of delays in sovereign debt restructuring and show that, despite superficial similarities, there are major differences across models in the driving force for equilibrium delay, the circumstances in which delay occurs, and the efficiency of the debt restructuring process. We focus on three key assumptions. First, if delay has a permanent effect on economic activity in the defaulting country, equilibrium delay ...
Working Papers , Paper 753

Fiscal Policy in Debt Constrained Economies

We study optimal fiscal policy in a small open economy (SOE) with sovereign and private default risk and limited commitment to tax plans. The SOE's government uses linear taxation to fund exogenous expenditures and uses public debt to inter-temporally allocate tax distortions. We characterize a class of environments in which the tax on labor goes to zero in the long run, while the tax on capital income may be non-zero, reversing the standard prediction of the Ramsey tax literature. The zero labor tax is an optimal long run outcome if the economy is subject to sovereign debt constraints and ...
Staff Report , Paper 518

Working Paper
The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Puerto Rico's unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth ...
Working Paper , Paper 18-3

Working Paper
The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis

Despite a formal 'no-bailout clause; we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a 'Southern view' of the crisis (transfers ...
International Finance Discussion Papers , Paper 1351


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