Optimal Domestic (and External) Sovereign Default
Pablo D'Erasmo () and
Enrique Mendoza ()
Additional contact information
Enrique Mendoza: University of Pennsylvania
PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania
Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a â€œforgotten historyâ€ in Macroeconomics. We propose a heterogeneous-agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to value of debt for self-insurance, liquidity and risk-sharing. The governmentâ€™s aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical co-movements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt and yet spreads are zero most of the time.
Keywords: Public debt; sovereign default; debt crisis; European crisis (search for similar items in EconPapers)
JEL-codes: E6 E44 F34 H63 (search for similar items in EconPapers)
Date: 2011-11-09, Revised 2016-08-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Working Paper: Optimal Domestic (and External) Sovereign Default (2017)
Working Paper: Optimal Domestic (And External) Sovereign Default (2016)
Working Paper: Optimal Domestic (and External) Sovereign Default (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:16-019
Access Statistics for this paper
More papers in PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 133 South 36th Street, Philadelphia, PA 19104. Contact information at EDIRC.
Bibliographic data for series maintained by Administrator ().