Birds of a feather: separating spillovers from shocks in sovereign default

Ryan Rudderham ()
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Ryan Rudderham: University of Northern Iowa

Annals of Finance, 2021, vol. 17, issue 3, No 3, 353-378

Abstract: Abstract In this paper, I propose a tractable model of sovereign default and the inter-state spillovers emanating from default. A coalition of nations may choose to insure against default, and the behavior of the coalition is used to examine the magnitude of the international spillovers. A voting structure for the coalition is proposed to examine idiosyncratic spillovers. The model is calibrated to the recent Greek Debt crisis to understand the spillovers from a default, and the moral hazard effect of the Troika. I find that spillover effects are large. If the rest of the world defaulted, this would create a loss equivalent to a permanent 9% decrease in government spending. Counterfactual experiments reveal that default would be prevalent without the IMF, suggesting that the own-penalty to defaulting has decreased since the IMF’s creation.

Keywords: Sovereign default; Optimal bailout; Contagion; Debt crisis; IMF (search for similar items in EconPapers)
JEL-codes: E43 E44 F33 F34 F55 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:kap:annfin:v:17:y:2021:i:3:d:10.1007_s10436-021-00392-6

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DOI: 10.1007/s10436-021-00392-6

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