Slow Moving Debt Crises

Guido Lorenzoni () and Iván Werning

No 19228, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What circumstances or policies leave sovereign borrowers at the mercy of self-fulfilling increases in interest rates? To answer this question, we study the dynamics of debt and interest rates in a model where default is driven by insolvency. Fiscal deficits and surpluses are subject to shocks but influenced by a fiscal policy rule. Whenever possible the government issues debt to meet its current obligations and defaults otherwise. We show that low and high interest rate equilibria may coexist. Higher interest rates, prompted by fears of default, lead to faster debt accumulation, validating default fears. We call such an equilibrium a slow moving crisis, in contrast to rollover crises where investor runs precipitate immediate default. We investigate how the existence of multiple equilibria is affected by the fiscal policy rule, the maturity of debt, and the level of debt.

JEL-codes: E6 F3 F34 (search for similar items in EconPapers)
Date: 2013-07
New Economics Papers: this item is included in nep-dge, nep-fmk, nep-mac and nep-opm
Note: EFG IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (76)

Published as Guido Lorenzoni & Iván Werning, 2019. "Slow Moving Debt Crises," American Economic Review, vol 109(9), pages 3229-3263.

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Related works:
Journal Article: Slow Moving Debt Crises (2019)
Working Paper: Slow Moving Debt Crises (2014)
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