International Spillovers and Bailouts

Marina Azzimonti and Vincenzo Quadrini

No 25011, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in countries that hold its debt, which could justify why a given country may want to bailout another. But why do creditor countries choose to bail out debtor countries instead of their own private sector? We show that this is because an external bailout could be cheaper than a domestic bailout. We also show that, although anticipated bailouts lead to higher borrowing, they can be Pareto improving not only ex-post (after a country has defaulted) but also ex-ante (before the country chooses its debt).

JEL-codes: E44 E6 E61 E62 F3 F36 F42 F44 H63 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-mac and nep-opm
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Published as Marina Azzimonti & Vincenzo Quadrini, 2024. "International Spillovers and Bailouts," Review of Economic Studies, vol 91(1), pages 77-128.

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Related works:
Journal Article: International Spillovers and Bailouts (2024)
Working Paper: International Spillovers and Bailouts (2019)
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