History remembered: Optimal sovereign default on domestic and external debt

D’Erasmo, Pablo and Enrique Mendoza
Authors registered in the RePEc Author Service: Pablo N. D'Erasmo

Journal of Monetary Economics, 2021, vol. 117, issue C, 969-989

Abstract: Infrequent but turbulent sovereign defaults on domestic creditors were a “forgotten history” in macroeconomics. We propose a Bewley model in which the government chooses debt and default on domestic and foreign creditors by balancing distributional incentives versus the benefits of debt for self-insurance, liquidity, and risk-sharing. A feedback mechanism links debt issuance, the debt distribution, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare and preceded by surging debt and spreads. Debt sells at the risk-free price most often but lack of commitment cuts sustainable debt sharply.

Keywords: Public debt; Sovereign default; Debt crisis; European crisis (search for similar items in EconPapers)
JEL-codes: E44 E6 F34 H63 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2019)
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018)
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:969-989

DOI: 10.1016/j.jmoneco.2020.07.006

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