Debt Fragility and Bailouts

Russell Cooper

No 18377, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies debt fragility and the sharing of the resulting strategic uncertainty through ex post bailouts. Default arises in equilibrium because of both fundamental shocks and beliefs. The probability of default depends on borrowing rates and, in equilibrium, on the beliefs of lenders about this probability. This interaction creates a strategic complementarity and thus the basis for strategic uncertainty. The paper analyzes the role of credible ex post bailouts as a means of sharing both fundamental and strategic uncertainty. While bailouts may occur in some states, debt fragility remains.

JEL-codes: E61 E63 F34 H87 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-mac
Note: EFG
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Citations: View citations in EconPapers (9)

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