Slow Moving Debt Crises

Guido Lorenzoni () and Iván Werning

American Economic Review, 2019, vol. 109, issue 9, 3229-63

Abstract: We study slow moving debt crises: self-fulfilling equilibria in which high interest rates, due to the fear of a future default, lead to a gradual but faster accumulation of debt, ultimately validating investors' fear. We show that slow moving crises arise in a variety of settings, both when fiscal policy follows a given rule and when it is chosen by an optimizing government. A key assumption, in all these settings, is that the borrowing government cannot commit to issue a fixed amount of bonds in a given period. We discuss how multiplicity is avoided for low debt levels, for sufficiently responsive fiscal policy rules, and for long enough debt maturities. When the equilibrium is unique, debt dynamics are characterized by a tipping point, below which debt falls and stabilizes and above which debt and default rates grow.

JEL-codes: E43 E62 H50 H63 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20141766
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: Slow Moving Debt Crises (2014)
Working Paper: Slow Moving Debt Crises (2013)
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