Public Debt, Bailouts and Common Bonds

Zarko Kalamov and Klaas Staal

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: We look at a model where countries of di fferent size provide local public goods with positive spillovers. Matching grants can induce socially-e fficient expenditure levels, but countries can induce bailouts. We consider the characteristics of these bailouts in a subgame-perfect Nash equilibrium and how these characteristics are a ffected by the introduction of common bonds. Partial substitution of common for sovereign bonds has two implications. First, it lowers the average and marginal borrowing costs of countries, which may be eligible for bailouts. This eff ect leads to higher borrowing in these countries irrespective of their bailout expectations. Second, the lower borrowing costs mitigate the incentives of countries to induce a bailout and, therefore, constrain parameter set for which a soft budget constraint equilibrium exists.

JEL-codes: H40 H70 R10 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-pbe
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Journal Article: Public debt, bailouts, and common bonds (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112979

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