Sovereign Debt and Structural Reforms

Andreas Müller, Kjetil Storesletten and Fabrizio Zilibotti
Authors registered in the RePEc Author Service: Andreas Müller

American Economic Review, 2019, vol. 109, issue 12, 4220-59

Abstract: We construct a dynamic theory of sovereign debt and structural reforms with limited enforcement and moral hazard. A sovereign country in recession wishes to smooth consumption. It can also undertake costly reforms to speed up recovery. The sovereign can renege on contracts by suffering a stochastic cost. The constrained optimal allocation (COA) prescribes imperfect insurance with nonmonotonic dynamics for consumption and effort. The COA is decentralized by a competitive equilibrium with markets for renegotiable GDP-linked one-period debt. The equilibrium features debt overhang: reform effort decreases in a high debt range. We also consider environments with less complete markets.

JEL-codes: D82 E21 E23 E32 F34 H63 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20161457
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Citations: View citations in EconPapers (12)

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Working Paper: Sovereign Debt and Structural Reforms (2015)
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