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A Quantitative Model of Sovereign Debt, Bailouts and Conditionality

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  • 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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  1. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-99, October.
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  10. Graham Bird, 2002. "The Completion Rate of IMF Programmes: What We Know, Don't Know and Need to Know," The World Economy, Wiley Blackwell, vol. 25(6), pages 833-847, 06.
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  22. C. Bora Durdu & Ricardo Nunes & Horacio Sapriza, 2013. "News and Sovereign Default Risk in Small Open Economies," Koç University-TUSIAD Economic Research Forum Working Papers 1309, Koc University-TUSIAD Economic Research Forum.
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Cited by:
  1. Florian Kirsch & Ronald Rühmkorf, 2013. "Sovereign Borrowing, Financial Assistance and Debt Repudiation," Bonn Econ Discussion Papers bgse01_2013, University of Bonn, Germany.
  2. 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.
  3. 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.
  4. repec:hal:wpaper:halshs-00692038 is not listed on IDEAS

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