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Rare Disasters, Financial Development, and Sovereign Debt

Sérgio Rebelo, Neng Wang and Jinqiang Yang

No 13202, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the implications of the interaction between rare disasters and financial development for sovereign debt markets. In our model, countries vary in their financial development, by which we mean the extent to which shocks can be hedged in international capital markets. The model predicts that low levels of financial development generate a key feature of sovereign debt in emerging economies known as "debt intolerance": high credit spreads associated with lower debt-to-output ratios than those of developed countries.

Keywords: Financial Development; Sovereign debt (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Date: 2018-09
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