A Quantitative Model of Sovereign Debt, Bailouts and Conditionality

Fabian Fink and Almuth Scholl

No 2011-46, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: International Financial Institutions provide temporary balance-of-payment support contingent on the implementation of specific macroeconomic policies. While several emerging markets repeatedly used conditional assistance, sovereign defaults occurred. This paper develops a dynamic stochastic model of a small open economy with endogenous default risk and endogenous participation rates in bailout programs. Conditionality enters as a constraint on fiscal policy. In a quantitative application to Argentina the model mimics the empirical duration and frequency of bailout programs. In equilibrium, conditional bailouts generate high and volatile interest spreads. A Laffer-curve in conditionality reflects the trade-off between fostering fiscal reform and creating incentives for non-compliance.

Keywords: sovereign debt; sovereign default; interest rate spread; fiscal policy; bailouts; conditionality (search for similar items in EconPapers)
JEL-codes: E44 E62 F34 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2011-11-30
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: A quantitative model of sovereign debt, bailouts and conditionality (2016)
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