EconPapers    
Economics at your fingertips  
 

Welfare gains of bailouts in a sovereign default model

Roberto Pancrazi, Hernán D. Seoane and Marija Vukotic ()

Journal of Economic Dynamics and Control, 2020, vol. 113, issue C

Abstract: We examine the welfare effects of bailouts in economies exposed to sovereign default risk. When a government of a small open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off. The bailout duration is endogenous and increases with its size. The bailout size creates non-trivial tradeoffs between receiving a larger amount of relatively cheap resources precisely in times of need on the one hand, and facing longer-lasting financial constraints and accumulated interest payments, on the other hand. We characterize and quantify these tradeoffs and document that welfare gains of bailouts are hump-shaped in the size of bailout loans.

Keywords: Default; Sovereign Risk; Bailouts (search for similar items in EconPapers)
JEL-codes: E44 F32 F34 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188920300361
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Welfare gains of bailouts in a sovereign default model (2019) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:113:y:2020:i:c:s0165188920300361

DOI: 10.1016/j.jedc.2020.103867

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-10-14
Handle: RePEc:eee:dyncon:v:113:y:2020:i:c:s0165188920300361