Self-Fulfilling Debt Crises: A Quantitative Analysis

Luigi Bocola and Alessandro Dovis

American Economic Review, 2019, vol. 109, issue 12, 4343-77

Abstract: This paper investigates the role of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk-averse lenders, and self-fulfilling crises à la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by both fundamental and nonfundamental risk. These two sources of risk have contrasting implications for the maturity structure of debt chosen by the government. Therefore, they can be indirectly inferred by tracking the evolution of debt maturity. We fit the model to Italian data and find that nonfundamental risk played a limited role during the 2008–2012 crisis.

JEL-codes: E43 E44 F34 G01 G15 H63 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/aer.20161471
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Citations: View citations in EconPapers (58)

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Related works:
Working Paper: Self-Fulfilling Debt Crises: A Quantitative Analysis (2016)
Working Paper: Self_fulfilling Debt Crises: A Quantitative Analysis (2016)
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