International spillovers and `ex-ante' efficient bailouts

Marina Azzimonti and Vincenzo Quadrini

No 318, 2019 Meeting Papers from Society for Economic Dynamics

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 also in other countries. This creates a vested-interest to bailout the defaulting country. A novel insight of the paper is that bailouts could be efficient not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt). Although anticipated bailouts create the typical moral hazard problem leading to higher borrowing, it may correct for the inefficient issuance of debt that results from the lack of cross-country policy coordination.

Date: 2019
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More papers in 2019 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.
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