Bailing out conflicted sovereigns

Charles W. Calomiris and Theofanis Tsoulouhas

Journal of Financial Intermediation, 2022, vol. 51, issue C

Abstract: How should sovereign bailouts take account of the effects bailouts have on policy reforms? Conflicted recipient governments complicate bailout choices because some reforms that spur growth reduce rents that benefit government decision makers. Our model takes account of whether bailout generosity and policy reforms are strategic substitutes, strategic complements or both, and each case implies a different optimal bailout contract, which generally cannot achieve First Best. Conditional forgiveness of some loan payments when economic outcomes are sufficiently favorable can achieve outcomes closer to First Best, and this is so for a small ex ante amount of the bailout subsidy.

Keywords: Sovereign debt; Rent seeking; Financial distress; Moral hazard (search for similar items in EconPapers)
JEL-codes: D72 D73 D82 F34 H63 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:51:y:2022:i:c:s1042957322000328

DOI: 10.1016/j.jfi.2022.100979

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