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  • Dirk Niepelt

    (Gerzensee; U Bern; IIES, Stockholm U)

  • Harris Dellas

    (University of Bern)

Abstract

We develop a model with official and private creditors where the probability of sovereign default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay but also carries extra costs such as reduced ex post flexibility. We characterize the equilibrium composition of debt across creditor groups. Our model can account for important features of sovereign debt crises: Namely, that official lending to sovereigns takes place only in times of debt distress, carries a favorable rate and tends to displace private funding. It also offers a novel perspective on the relationship between debt overhang and default risk: The availability of official debt makes default on outstanding debt more likely.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 12.

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Date of creation: 2013
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Handle: RePEc:red:sed013:12

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  1. Egil Matsen & Ragnar Torvik & Tommy Sveen, 2004. "Savers, Spenders and Fiscal Policy in a Small Open Economy," Working Paper Series 4704, Department of Economics, Norwegian University of Science and Technology.
  2. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  3. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign risk and secondary markets," Economics Working Papers 998, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2009.
  4. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates, and the current account," Working Papers 04-5, Federal Reserve Bank of Boston.
  5. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
  6. Dirk Niepelt, 2008. "Debt Maturity without Commitment," Working Papers 08.05, Swiss National Bank, Study Center Gerzensee.
  7. Emine Boz, 2009. "Sovereign Default, Private Sector Creditors and the IFIs," IMF Working Papers 09/46, International Monetary Fund.
  8. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," NBER Working Papers 7571, National Bureau of Economic Research, Inc.
  9. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  10. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default in "Bad Times" ?," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 352-360, 04-05.
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