EconPapers    
Economics at your fingertips  
 

Optimal Domestic (and External) Sovereign Default

Pablo D'Erasmo () and Enrique Mendoza ()

No 17-4, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history” in macroeconomics. We propose 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 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 comovements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt, and yet spreads are zero most of the time.

Keywords: public debt; sovereign default; debt crisis; European crisis (search for similar items in EconPapers)
JEL-codes: E44 E6 F34 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2017-02-10
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.philadelphiafed.org/-/media/research-a ... 17/wp17-04.pdf?la=en Full text (application/pdf)

Related works:
Working Paper: Optimal Domestic (And External) Sovereign Default (2016) Downloads
Working Paper: Optimal Domestic (and External) Sovereign Default (2016) Downloads
Working Paper: Optimal Domestic (and External) Sovereign Default (2016) Downloads
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:fip:fedpwp:17-4

Ordering information: This working paper can be ordered from
http://www.phil.frb.org/econ/wps/index.html

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().

 
Page updated 2019-07-18
Handle: RePEc:fip:fedpwp:17-4