Self-Fulfilling Debt Crises

Harold Cole and Timothy Kehoe

The Review of Economic Studies, 2000, vol. 67, issue 1, 91-116

Abstract: We characterize the values of government debt and the debt's maturity structure under which financial crises brought on by a loss of confidence in the government can arise within a dynamic, stochastic general equilibrium model. We also characterize the optimal policy response of the government to the threat of such a crisis. We show that when the country's fundamentals place it inside the crisis zone, the government may be motivated to reduce its debt and exit the crisis zone because this leads to an economic boom and a reduction in the interest rate on the government's debt. We show that this reduction can be gradual if debt is high or the probability of a crisis is low. We also show that, while lengthening the maturity of the debt can shrink the crisis zone, credibility-inducing policies can have perverse effects.

Date: 2000
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (497)

Downloads: (external link)
http://hdl.handle.net/10.1111/1467-937X.00123 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Self-Fulfilling Debt Crises (1998)
Working Paper: Self-fulfilling debt crises (1998)
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:oup:restud:v:67:y:2000:i:1:p:91-116.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().