Gambling for Redemption and Self-Fulfilling Debt Crises

Juan Carlos Conesa and Timothy Kehoe

No 21026, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a model for analyzing the sovereign debt crises of 2010–2013 in the Eurozone. The government sets its expenditure-debt policy optimally. The need to sell large quantities of bonds every period leaves the government vulnerable to self-fulfilling crises in which investors, anticipating a crisis, are unwilling to buy the bonds, thereby provoking the crisis. In this situation, the optimal policy of the government is to reduce its debt to a level where crises are not possible. If, however, the economy is in a recession where there is a positive probability of recovery in fiscal revenues, the government may optimally choose to “gamble for redemption,” running deficits and increasing its debt, thereby increasing its vulnerability to crises.

JEL-codes: F34 F45 G01 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-cba, nep-eec and nep-opm
Note: EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

Published as Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 707-740, December.
Published as Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, vol 64(4), pages 707-740.

Downloads: (external link)
http://www.nber.org/papers/w21026.pdf (application/pdf)

Related works:
Journal Article: Gambling for redemption and self-fulfilling debt crises (2017)
Working Paper: Gambling for redemption and self-fulfilling debt crises (2012)
Working Paper: Gambling for Redemption and Self-Fulfilling Debt Crises (2012)
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:nbr:nberwo:21026

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w21026

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().