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) 
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018) 
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018) 
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 ().