Gambling for Redemption and Self-Fulfilling Debt Crises

Timothy Kehoe and Juan Carlos Conesa

No 614, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a model for analyzing the sovereign debt crises of 2010 and 2011 in such European countries as Greece, Ireland, and Portugal. The government sets its expenditure-debt policy optimally given a fixed probability of a recovery in fiscal revenues. In doing so, the government can optimally choose to “gamble for redemption,†and the economy can be optimally driven to a level of debt that increases its vulnerability to self-fulfilling debt crises. The model explains why, in contrast to the Mexican crisis of 1994–95, where a loan package put together by U.S. President Bill Clinton put an immediate end to the crisis, rescue packages put together by the European Union do not seem to have ended the crises in Greece, Ireland, or Portugal.

Date: 2012
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2012/paper_614.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 (2015)
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:red:sed012:614

Access Statistics for this paper

More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().