Self-Ful?lling Debt Crises, Revisited

Mark Aguiar, Satyajit Chatterjee (), Harold Cole and Zachary Stangebye ()
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Mark Aguiar: Princeton University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap in time (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show that the same lack of commitment leads to a rich set of possible self-ful?lling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a “sudden stop” (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government’s incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the model, including such crises increase the default probabilities by a factor of ?ve and the spread volatility by a factor of twenty-?ve.

Keywords: self-ful?lling debt crises; rollover crises (search for similar items in EconPapers)
JEL-codes: F1 G3 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2020-01-17
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Related works:
Journal Article: Self-Fulfilling Debt Crises, Revisited (2022)
Working Paper: Self-Fulfilling Debt Crises, Revisited (2021)
Working Paper: Self-Fulfilling Debt Crises, Revisited (2020)
Working Paper: Self-Fulfilling Debt Crises, Revisited (2017)
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