Bargained haircuts and debt policy implications

Aloisio Araujo, Marcia Leon and Rafael Santos ()

Economic Theory, 2017, vol. 64, issue 4, No 3, 635-656

Abstract: Abstract We extend the Cole and Kehoe model (J Int Econ 41:309–330, 1996) by adding a Rubinstein bargaining game between creditors and debtor country to determine the share of debt repayment in a sovereign debt crisis. Ex-post, the possibility of partial repayment avoids the costly case of total default, as seen recently in Greece. Ex-ante, the effects are to increase the sovereign debt cap and delay the fiscal adjustment. In other words, expectations of a haircut in times of crisis relax leverage restrictions implied by financial markets and make government more lenient, suggesting caution with haircut adoption, especially when risk-free interest rates are low.

Keywords: Partial default; Speculative attacks; Debt crisis; Leverage (search for similar items in EconPapers)
JEL-codes: F34 G01 H63 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://link.springer.com/10.1007/s00199-016-0981-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: Bargained Haircuts and Debt Policy Implications (2016)
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:spr:joecth:v:64:y:2017:i:4:d:10.1007_s00199-016-0981-4

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-016-0981-4

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().