Advanced Search
MyIDEAS: Login

Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects

Contents:

Author Info

  • Broner, Fernando
  • Erce, Aitor
  • Martin, Alberto
  • Ventura, Jaume

Abstract

In 2007, countries in the euro zone periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private sector to the public sector, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the euro zone, and how they may be addressed by policies at the European level.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S030439321300158X
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 61 (2014)
Issue (Month): C ()
Pages: 114-142

as in new window
Handle: RePEc:eee:moneco:v:61:y:2014:i:c:p:114-142

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Sovereign debt; Discrimination; Crowding out; Rollover crises; Economic growth;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Juan J. Cruces & Christoph Trebesch, 2011. "Sovereign Defaults: The Price of Haircuts," CESifo Working Paper Series 3604, CESifo Group Munich.
  2. Lanau, Sergi, 2011. "The contractual approach to sovereign debt restructuring," Bank of England working papers 409, Bank of England.
  3. Jochen R. Andritzky, 2012. "Government Bonds and their Investors," IMF Working Papers 12/158, International Monetary Fund.
  4. Timothy Kehoe & Juan Carlos Conesa, 2012. "Gambling for Redemption and Self-Fulfilling Debt Crises," 2012 Meeting Papers 614, Society for Economic Dynamics.
  5. Mark Aguiar & Manuel Amador, 2009. "Growth in the Shadow of Expropriation," NBER Working Papers 15194, National Bureau of Economic Research, Inc.
  6. Cruces, Juan J. & Trebesch, Christoph, 2013. "Sovereign defaults: The price of haircuts," Munich Reprints in Economics 20036, University of Munich, Department of Economics.
  7. Yan Bai & Jing Zhang, 2009. "Duration of Sovereign Debt Renegotiation," Working Papers 593, Research Seminar in International Economics, University of Michigan.
  8. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
  9. Fernando A. Broner & Alberto Martín & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," Working Papers 288, Barcelona Graduate School of Economics.
  10. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
  11. Silvia Ardagna & Francesco Caselli, 2012. "The Political Economy of the Greek Debt Crisis: A Tale of Two Bailouts," CEP Special Papers 25, Centre for Economic Performance, LSE.
  12. Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 889-946.
  13. Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
  14. Broner, Fernando A & Ventura, Jaume, 2006. "Globalization and Risk Sharing," CEPR Discussion Papers 5820, C.E.P.R. Discussion Papers.
  15. Serkan Arslanalp & Takahiro Tsuda, 2012. "Tracking Global Demand for Advanced Economy Sovereign Debt," IMF Working Papers 12/284, International Monetary Fund.
  16. Mark Aguiar & Manuel Amador & Gita Gopinath, 2009. "Investment Cycles and Sovereign Debt Overhang," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 1-31.
  17. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  18. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
  19. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2010. "Gross Capital Flows: Dynamics and Crises," Working Papers 476, Barcelona Graduate School of Economics.
  20. Silvia Merler & Jean Pisani-Ferry, 2012. "Who's afraid of sovereign bonds?," Policy Contributions 695, Bruegel.
  21. Oren Sussman & Alexander Guembel, 2005. "Sovereign Debt Without Default Penalties," OFRC Working Papers Series 2005fe17, Oxford Financial Research Centre.
  22. Aitor Erce, 2012. "Selective sovereign defaults," Globalization and Monetary Policy Institute Working Paper 127, Federal Reserve Bank of Dallas.
  23. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2013. "Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises," NBER Working Papers 19516, National Bureau of Economic Research, Inc.
  24. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
  25. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
  26. Mengus, E., 2014. "Honoring Sovereign Debt or Bailing Out Domestic Residents: A Theory of Internal Costs of Default," Working papers 480, Banque de France.
  27. Alexander Guembel & Oren Sussman, 2009. "Sovereign Debt without Default Penalties," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1297-1320.
  28. Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
  29. Guido Lorenzoni & Ivan Werning, 2013. "Slow Moving Debt Crises," NBER Working Papers 19228, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Filippo Brutti & Philip Ulrich Sauré, 2014. "Repatriation of Debt in the Euro Crisis: Evidence for the Secondary Market Theory," Working Papers 2014-03, Swiss National Bank.
  2. Paolo Angelini & Giuseppe Grande & Fabio Panetta, 2014. "The negative feedback loop between banks and sovereigns," Questioni di Economia e Finanza (Occasional Papers) 213, Bank of Italy, Economic Research and International Relations Area.
  3. Galina Hale & Maurice Obstfeld, 2014. "The Euro and The Geography of International Debt Flows," NBER Working Papers 20033, National Bureau of Economic Research, Inc.
  4. Harald Uhlig, 2013. "Sovereign Default Risk and Banks in a Monetary Union," CESifo Working Paper Series 4368, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:61:y:2014:i:c:p:114-142. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.