Managing Default Risk

Anna Zabai

No 467, BIS Working Papers from Bank for International Settlements

Abstract: High sovereign debt in advanced economies has recently revived the debate about the role of coordination problems and self-fulfilling beliefs as drivers of sovereign default risk. I show how default risk can be decomposed in a solvency-risk component and a coordination-risk component. I then study how fiscal policy can be effective in managing the risk of coordination and I characterise how the shape of the optimal policy is affected by the presence of this risk: making the deficit contingent on interest rate movements is more effective in managing default risk than using non-contingent fiscal targets.

Keywords: Default risk; fiscal policy; coordination; global games. (search for similar items in EconPapers)
Pages: 54 pages
Date: 2014-10
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:467

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