EconPapers    
Economics at your fingertips  
 

History Remembered: Optimal Sovereign Default on Domestic and External Debt

Pablo D'Erasmo () and Enrique Mendoza ()

No 25073, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Infrequent but turbulent overt sovereign defaults on domestic creditors are a “forgotten history” in Macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives v. the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency), and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply.

JEL-codes: E44 E6 F34 H63 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Note: EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Published as Pablo D’Erasmo & Enrique G. Mendoza, 2020. "History Remembered: Optimal Sovereign Default on Domestic and External Debt," Journal of Monetary Economics, .

Downloads: (external link)
http://www.nber.org/papers/w25073.pdf (application/pdf)

Related works:
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2019) Downloads
Working Paper: History Remembered: Optimal Sovereign Default on Domestic and External Debt (2018) Downloads
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:25073

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25073

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 ().

 
Page updated 2020-09-15
Handle: RePEc:nbr:nberwo:25073