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Restructuring the Sovereign Debt Restructuring Mechanism

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  • Mark L. J. Wright
  • Rohan Pitchford

Abstract

Sovereign defaults are time consuming and costly to resolve ex post. But these costs also improve borrowing incentives ex ante. What is the optimal tradeoff between efficient borrowing ex ante and the costs of default ex post? What policy reforms, from collective action clauses to an international bankruptcy court, would attain this optimal tradeoff? Towards an answer to these questions, this paper presents a simple incomplete markets model of sovereign borrowing that is coupled with an explicit and flexible model of the sovereign debt restructuring process. We characterize the optimal amount of delay, and explore numerically the effects of various policy options on the amount of delay in renegotiations, and on the efficiency of capital flows.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 147.

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Date of creation: 2008
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Handle: RePEc:red:sed008:147

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Cited by:
  1. Tamon Asonuma, 2010. "Serial Default and Debt Renegotiation," 2010 Meeting Papers, Society for Economic Dynamics 169, Society for Economic Dynamics.
  2. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201004, Department of Economics, University of St. Andrews.
  3. Rohan Pitchford & Mark L. J. Wright, 2010. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," NBER Working Papers 16632, National Bureau of Economic Research, Inc.
  4. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-100, Scottish Institute for Research in Economics (SIRE).
  5. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default in "Bad Times" ?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 5(2-3), pages 352-360, 04-05.
  6. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2010. "International Government Debt," Business School Working Papers, Universidad Torcuato Di Tella 2010-03, Universidad Torcuato Di Tella.
  7. Ran Bi, 2008. "Beneficial Delays in Debt Restructuring Negotiations," IMF Working Papers, International Monetary Fund 08/38, International Monetary Fund.

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