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Endogenous debt crises

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  • Cohen, Daniel
  • Villemot, Sébastien

Abstract

We distinguish two types of debt crises: those that are the outcome of exogenous shocks (to productivity growth for instance) and those that are endogenously created, either by self-fulfilling panic in financial markets or by the reckless behavior of "Panglossian" borrowers. After Krugman, we characterize as "Panglossian" those borrowers who only focus on their best growth prospects, anticipating to default on their debt if hit by an adverse shock, rationally ignoring the risk of default. We apply these categories empirically to the data. We show that, taken together, endogenous crises are powerful explanations of debt crises, more important for instance than the sheer effect of growth on a country's solvency.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8270.

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Date of creation: Feb 2011
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Handle: RePEc:cpr:ceprdp:8270

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Related research

Keywords: Self-fulfilling crises; Sovereign debt;

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References

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  1. Chamon, Marcos, 2007. "Can debt crises be self-fulfilling?," Journal of Development Economics, Elsevier, vol. 82(1), pages 234-244, January.
  2. Campos, Camila F.S. & Jaimovich, Dany & Panizza, Ugo, 2006. "The unexplained part of public debt," Emerging Markets Review, Elsevier, vol. 7(3), pages 228-243, September.
  3. Gaston Gelos & Guido Sandleris & Ratna Sahay, 2004. "Sovereign Borrowing by Developing Countries: What Determines Market Access?," IMF Working Papers 04/221, International Monetary Fund.
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Cited by:
  1. Villemot, Sébastien, 2012. "Accelerating the resolution of sovereign debt models using an endogenous grid method," Dynare Working Papers 17, CEPREMAP.
  2. Daniel Cohen & Sébastien Villemot, 2012. "The sovereign default puzzle: Modelling issues and lessons for Europe," Working Papers halshs-00692038, HAL.
  3. Slacík, Tomáš & Jakubík, Petr, 2013. "Measuring Financial (In)Stability in Emerging Europe: A New Index-Based Approach," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 25.
  4. Cohen, Daniel & Villemot, Sébastien, 2012. "The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe," CEPR Discussion Papers 8971, C.E.P.R. Discussion Papers.

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