Sovereign Default Triggered by Inability to Repay Debt

Michinao Okachi
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Michinao Okachi: Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Department of Economics, Graduate School of Economics and Management, Tohoku University, E-mail: michinao.okachi.e5@tohoku.ac.jp)

No 19-E-10, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: The Greek sovereign default episode in 2012 was characterized by its high debt-to-GDP ratio and the severe economic contraction following the default. Conventional strategic default models designed to analyze a government's incentive to default often fail to replicate these characteristics. To address this issue, we provide a dynamic stochastic general equilibrium (DSGE) model where a sovereign default is triggered by the government's inability to repay its debt. We show that the inability-to-repay model replicates the empirical features observed in Greece, while the conventional strategic default model calibrated to the Greek economy does not.

Keywords: Sovereign Default; Dynamic Stochastic General Equilibrium; Inability to Repay Debt; Strategic Decision to Default; Fiscal Limit; Laffer Curve (search for similar items in EconPapers)
JEL-codes: E32 E44 F34 H63 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-dge and nep-mac
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