Self-Fulfilling Debt Crises: A Quantitative Analysis

Luigi Bocola and Alessandro Dovis

No 22694, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses the information contained in the joint dynamics of government’s debt maturity choices and interest rate spreads to quantify the importance of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk averse lenders and self-fulfilling rollover crises á la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by economic fundamentals and by expectations of future self-fulfilling defaults. These two sources of default risk have contrasting implications for the debt maturity choices of the government. Therefore, they can be indirectly inferred by tracking the evolution of the maturity structure of debt during a crisis. We fit the model to the Italian debt crisis of 2008-2012, finding that 12% of the spreads over this episode were due to rollover risk. Our results have implications for the effects of the liquidity provisions established by the European Central Bank during the summer of 2012.

JEL-codes: E44 F34 G12 G15 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (46)

Published as Luigi Bocola & Alessandro Dovis, 2019. "Self-Fulfilling Debt Crises: A Quantitative Analysis," American Economic Review, vol 109(12), pages 4343-4377.

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Related works:
Journal Article: Self-Fulfilling Debt Crises: A Quantitative Analysis (2019)
Working Paper: Self_fulfilling Debt Crises: A Quantitative Analysis (2016)
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