EconPapers    
Economics at your fingertips  
 

History Remembered: Optimal Sovereign Default on Domestic and External Debt

Pablo D'Erasmo and Enrique Mendoza

No 19-31, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Infrequent but turbulent overt sovereign defaults on domestic creditors are a ?for- gotten history? in macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives versus the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency) and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government?s lack of commitment reduces sustainable debt sharply.

Keywords: public debt; sovereign defaults; debt crisis; European crisis (search for similar items in EconPapers)
JEL-codes: E44 E6 F34 H63 (search for similar items in EconPapers)
Pages: 88 pages
Date: 2019-07-22
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2019/wp19-31.pdf (application/pdf)

Related works:
Journal Article: History remembered: Optimal sovereign default on domestic and external debt (2021) Downloads
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018) Downloads
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018) 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:19-31

Ordering information: This working paper can be ordered from

DOI: 10.21799/frbp.wp.2019.31

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 2025-03-31
Handle: RePEc:fip:fedpwp:19-31