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A Quantitative Model of Sovereign Debt, Bailouts and Conditionality

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Author Info

  • Fabian Fink

    ()
    (Department of Economics, University of Konstanz, Germany)

  • Almuth Scholl

    ()
    (Department of Economics, University of Konstanz, Germany)

Abstract

International Financial Institutions provide temporary balance-of-payment support contingent on the implementation of specific macroeconomic policies. While several emerging markets repeatedly used conditional assistance, sovereign defaults occurred. This paper develops a dynamic stochastic model of a small open economy with endogenous default risk and endogenous participation rates in bailout programs. Conditionality enters as a constraint on fiscal policy. In a quantitative application to Argentina the model mimics the empirical duration and frequency of bailout programs. In equilibrium, conditional bailouts generate high and volatile interest spreads. A Laffer-curve in conditionality reflects the trade-off between fostering fiscal reform and creating incentives for non-compliance.

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Bibliographic Info

Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2011-46.

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Length: 29 pages
Date of creation: 30 Nov 2011
Date of revision:
Handle: RePEc:knz:dpteco:1146

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Related research

Keywords: sovereign debt; sovereign default; interest rate spread; fiscal policy; bailouts; conditionality;

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References

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  1. Graham Bird, . "The IMF: A Bird's Eye View of its Role and Operations," School of Economics Discussion Papers 0407, School of Economics, University of Surrey, revised Jan 2007.
  2. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
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Citations

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Cited by:
  1. Almuth Scholl, 2013. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Working Paper Series of the Department of Economics, University of Konstanz 2013-23, Department of Economics, University of Konstanz.
  2. Florian Kirsch & Ronald Rühmkorf, 2013. "Sovereign Borrowing, Financial Assistance and Debt Repudiation," Bonn Econ Discussion Papers bgse01_2013, University of Bonn, Germany.
  3. Daniel Cohen & Sébastien Villemot, 2012. "The sovereign default puzzle: Modelling issues and lessons for Europe," Working Papers halshs-00692038, HAL.
  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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