Optimal Domestic (And External) Sovereign Default

Pablo D'Erasmo and Enrique Mendoza

Working Papers from eSocialSciences

Abstract: Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history†in Macroeconomics. This paper proposes a heterogeneous-agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to the value of debt for self-insurance, liquidity and risk sharing. The government's aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical co-movements and features of debt-crisis dynamics. [Working Paper 22509]

Keywords: Optimal Domestic; External Sovereign Default; domestic creditors; Macroeconomics; heterogeneous-agents model; cyclical co-movements; debt-crisis dynamics (search for similar items in EconPapers)
Date: 2016-08
Note: Institutional Papers
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Optimal Domestic (and External) Sovereign Default (2017)
Working Paper: Optimal Domestic (and External) Sovereign Default (2017)
Working Paper: Optimal Domestic (and External) Sovereign Default (2016)
Working Paper: Optimal Domestic (and External) Sovereign Default (2016)
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