Self-Fulfilling Debt Crises, Revisited
Satyajit Chatterjee (),
Harold Cole () and
Zachary Stangebye ()
No 20-03, Working Papers from Federal Reserve Bank of Philadelphia
We revisit self-fulﬁlling rollover crises by exploring the potential uncertainty introduced by a gap in time (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show that the same lack of commitment leads to a rich set of possible self-fulﬁlling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a “sudden stop” (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government’s incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the model, including such crises in-creases the default probabilities by a factor of ﬁve and the spread volatility by a factor of twenty-ﬁve.
Keywords: rollover crises; self-fulﬁlling debt crises (search for similar items in EconPapers)
JEL-codes: F1 G3 (search for similar items in EconPapers)
Date: 2020-01-22, Revised 2020-01-22
New Economics Papers: this item is included in nep-dge and nep-opm
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://philadelphiafed.org/-/media/research-and-d ... ers/2020/wp20-03.pdf (text/html)
Working Paper: Self-Ful?lling Debt Crises, Revisited (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:87393
Ordering information: This working paper can be ordered from
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 ().