Fragile Debt and the Credible Sharing of Strategic Uncertainty
AbstractThis paper studies debt fragility. It provides conditions under which fundamentals and strategic uncertainty jointly determine the price of sovereign debt. Default arises in equilibrium both because of fundamental shocks and beliefs. The probability of default depends on borrowing rates and, in equilibrium, on the beliefs of lenders about this probability. This interaction creates a strategic complementarity and thus the basis for strategic uncertainty. The paper analyzes the role of debt guarantees as a means of sharing both fundamental and strategic uncertainty. It provides conditions for the credibility of those guarantees as well as ex post bailouts. The effects of debt purchases by a monetary authority are analyzed as well.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18377.
Date of creation: Sep 2012
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Find related papers by JEL classification:
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
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- König, Philipp & Anand, Kartik & Heinemann, Frank, 2013. "The "Celtic Case": Guarantees, transparency and dual debt crises," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79747, Verein für Socialpolitik / German Economic Association.
- Philipp König & Kartik Anand & Frank Heinemann, 2013.
"The ‘Celtic Crisis’: Guarantees, transparency, and systemic liquidity risk,"
SFB 649 Discussion Papers
SFB649DP2013-025, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Philipp König & Kartik Anand & Frank Heinemann, 2013. "The ‘Celtic Crisis’: Guarantees, Transparency and Systemic Liquidity Risk," Working Papers 13-31, Bank of Canada.
- Roberto Tamborini, 2012. "Market opinions, fundamentals and the euro-sovereign debt crisis," Department of Economics Working Papers 1210, Department of Economics, University of Trento, Italia.
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