Avoiding Sovereign Default Contagion: A Normative Analysis

Sergio de Ferra and Enrico Mallucci

No 1275, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be replicated in a decentralized setting with Pigouvian taxes on debt.

Keywords: Sovereign default; Sovereign contagion; Bailouts; Pigouvian taxes (search for similar items in EconPapers)
JEL-codes: F34 F41 F45 H63 (search for similar items in EconPapers)
Pages: 49
Date: 2020-02-27
New Economics Papers: this item is included in nep-eec and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Avoiding sovereign default contagion: A normative analysis (2025)
Working Paper: Avoiding Sovereign Default Contagion: A Normative Analysis (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1275

DOI: 10.17016/IFDP.2020.1275

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