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Sovereign debt and reserves with liquidity and productivity crises

Flavia Corneli () and Emanuele Tarantino

No 1012, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: During the recent financial crisis developing countries have continued to accumulate both sovereign reserves and debt. To account for this empirical fact, we model the optimal portfolio choice of a country that is subject to liquidity and productivity shocks. We determine the equilibrium level of debt and its cost through a contracting game between a country and international lenders. Although raising debt increases the sovereign exposure to liquidity and productivity crises, the simultaneous accumulation of reserves can mitigate the negative effects of such crises. This mechanism rationalizes the complementarity between debt and reserves.

Keywords: sovereign debt; international reserves; liquidity shock; productivity shock; strategic default. (search for similar items in EconPapers)
JEL-codes: F34 F40 G15 H63 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-opm
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Journal Article: Sovereign debt and reserves with liquidity and productivity crises (2016) Downloads
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