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Volatility and Sovereign Default

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Author Info

  • Luisa Lambertini

    ()
    (Boston College)

Abstract

The history of international lending shows that countries default on external debt when their economies experience a downturn. This paper presents a theoretical model of international lending that is consistent with this evidence. In this model, output is stochastic, international capital markets are incomplete because borrowing can only occur via issuing bonds, and borrowers cannot commit to repay loans. Self-fulfilling and solvency debt crises arise when borrowers experience low output realizations; moreover, when lenders are atomistic, self- fulfilling crises may arise for debt levels that do not cause default when lenders are non-atomistic. Alternative reforms to eliminate liquidity crises are analyzed. An international lender of last resort can eliminate liquidity crises provided it implements full bailouts via purchasing debt at its market price.

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File URL: http://fmwww.bc.edu/EC-P/wp577.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 577.

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Length: 30 pages
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:boc:bocoec:577

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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
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Web page: http://fmwww.bc.edu/EC/
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Related research

Keywords: Sovereign debt; Default; Self-fulfilling Crises;

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References

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  2. Cole, Harold L & Kehoe, Timothy J, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 91-116, January.
  3. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
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  7. Sachs, Jeffrey D, 1990. "A Strategy for Efficient Debt Reduction," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 19-29, Winter.
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  17. Kenen, Peter B, 1990. "Organizing Debt Relief: The Need for a New Institution," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 7-18, Winter.
  18. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  19. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
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Cited by:
  1. Antoine Martin, 2002. "Reconciling Bagehot with the Fed's response to Sept. 11," Research Working Paper RWP 02-10, Federal Reserve Bank of Kansas City.

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