International Spillovers and Bailouts

Marina Azzimonti and Vincenzo Quadrini

Department of Economics Working Papers from Stony Brook University, Department of Economics

Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in other countries. This creates a vested-interest to bailout the defaulting country. A novel insight of the paper is that, although anticipated bailouts lead to higher borrowing, this may correct for the under-issuance of debt due to the lack of cross-country policy coordination. As a result, bailouts could be Pareto improving not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt).

Date: 2019
New Economics Papers: this item is included in nep-opm
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Related works:
Journal Article: International Spillovers and Bailouts (2024)
Working Paper: International Spillovers and Bailouts (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:nys:sunysb:19-06

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