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A quantitative model of sovereign debt, bailouts and conditionality

Fabian Fink and Almuth Scholl

Journal of International Economics, 2016, vol. 98, issue C, 176-190

Abstract: In times of sovereign debt crises, International Financial Institutions provide temporary financial support contingent on the implementation of specific macroeconomic policies. This paper develops a model of sovereign debt and default with endogenous participation rates in bailout programs. Conditionality enters as a constraint on fiscal policy. In the model, the insurance character of bailouts generates incentives for debt accumulation. Quantitative results suggest that bailouts prevent sovereign defaults in the short-run but may come at a cost of a greater default probability in the long-run. Increasing the intensity of conditionality lowers the bailout participation rate and generates a hump-shaped pattern of sovereign default risk.

Keywords: Sovereign debt; Sovereign default risk; Bailouts; Conditionality; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E44 E62 F34 (search for similar items in EconPapers)
Date: 2016
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Working Paper: A Quantitative Model of Sovereign Debt, Bailouts and Conditionality (2011) Downloads
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DOI: 10.1016/j.jinteco.2015.09.007

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