Sovereign Default and Liquidity: The Case for a World Safe Asset

François Le Grand and Xavier Ragot
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François Le Grand: EM - EMLyon Business School, ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]

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Abstract: This paper presents a positive and normative study of a world financial market when sovereign countries can default on their debt. We construct a tractable model that enables us to study sovereign default in general equilibrium. The amount of safe assets is thus endogenous and determined by international risk-sharing. We characterize the equilibrium structure and we show that the market equilibrium can generate multiple equilibria. In addition, the market equilibrium is not constrained-efficient because countries do not fully internalize the value of their debt being used as liquidity. We prove that a world fund issuing a safe asset increases aggregate welfare. The fund's relationship with the IMF's Special Drawing Rights is discussed.

Keywords: Sovereign Default; Safe Asset; International Liquidity (search for similar items in EconPapers)
Date: 2021-07
New Economics Papers: this item is included in nep-dge and nep-opm
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03501397v1
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Published in Journal of International Economics, 2021, 131, pp.103462. ⟨10.1016/j.jinteco.2021.103462⟩

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Related works:
Journal Article: Sovereign default and liquidity: The case for a world safe asset (2021)
Working Paper: Sovereign default and liquidity: The case for a world safe asset (2021)
Working Paper: Sovereign Default and Liquidity: The Case for a World Safe Asset (2021)
Working Paper: Sovereign default and liquidity: The case for a world safe asset (2021)
Working Paper: Sovereign Default and Liquidity: the Case for a World Safe Asset (2017)
Working Paper: Sovereign Default and Liquidity: the Case for a World Safe Asset (2017)
Working Paper: Sovereign Default and Liquidity: the Case for a World Safe Asset (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03501397

DOI: 10.1016/j.jinteco.2021.103462

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