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Sargent-Wallace meets Krugman-Flood-Garber, or: why sovereign debt swaps do not avert macroeconomic crises

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  • Joshua Aizenman
  • Kenneth M. Kletzer
  • Brian Pinto

Abstract

This paper argues that the frequent failure of the debt swaps follows from fundamental forces driven by the market's assessment of the scarcity of fiscal revenue relative to the demand for fiscal outlays. As a country approaches the range of partial default, swaps may not provide the expected breathing room and could even bring the crisis forward. Our methodology combines three independent themes: exchange rate crises as the manifestation of excessive monetary injections, the fiscal theory of inflation and sovereign debt. The integrated framework derives devaluation and external debt repudiation as part of a public-finance optimising problem. Copyright 2005 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 115 (2005)
Issue (Month): 503 (04)
Pages: 343-367

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Handle: RePEc:ecj:econjl:v:115:y:2005:i:503:p:343-367

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  1. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," International Finance 0003004, EconWPA.
  2. Jeremy Bulow & Kenneth Rogoff, 1988. "The Buyback Boondoggle," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 675-704.
  3. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  4. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67.
  5. Homi Kharas & Brian Pinto & Sergei Ulatov, 2001. "An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 1-68.
  6. Kenneth Kang & Hong Liang & Henry Ma & Anthony J. Richards & Ajai Chopra & Meral Karasulu, 2001. "From Crisis to Recovery in Korea," IMF Working Papers 01/154, International Monetary Fund.
  7. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  8. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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Cited by:
  1. Aizenman, Joshua, 2005. "Financial Liberalizations in Latin-America in the 1990s: A Reassessment," Santa Cruz Department of Economics, Working Paper Series qt8g77c9dh, Department of Economics, UC Santa Cruz.
  2. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," Working Papers 92, Institute of Empirical Economic Research.
  3. Togo, Eriko, 2007. "Coordinating public debt management with fiscal and monetary policies : an analytical framework," Policy Research Working Paper Series 4369, The World Bank.
  4. Garima Vasishtha, 2007. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Working Papers 07-33, Bank of Canada.
  5. Andrew Swiston, 2011. "Official Dollarization As a Monetary Regime," IMF Working Papers 11/129, International Monetary Fund.
  6. Gill, Indermit & Pinto, Brian, 2005. "Public debt in developing countries : has the market-based model worked?," Policy Research Working Paper Series 3674, The World Bank.
  7. Joshua Aizenman & Brian Pinto, 2004. "Managing Volatility and Crises: A Practitioner's Guide Overview," NBER Working Papers 10602, National Bureau of Economic Research, Inc.

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