IDEAS home Printed from https://ideas.repec.org/a/aea/aecrev/v109y2019i12p4220-59.html

Sovereign Debt and Structural Reforms

Author

Listed:
  • Andreas Müller
  • Kjetil Storesletten
  • Fabrizio Zilibotti

Abstract

We construct a dynamic theory of sovereign debt and structural reforms with limited enforcement and moral hazard. A sovereign country in recession wishes to smooth consumption. It can also undertake costly reforms to speed up recovery. The sovereign can renege on contracts by suffering a stochastic cost. The constrained optimal allocation (COA) prescribes imperfect insurance with nonmonotonic dynamics for consumption and effort. The COA is decentralized by a competitive equilibrium with markets for renegotiable GDP-linked one-period debt. The equilibrium features debt overhang: reform effort decreases in a high debt range. We also consider environments with less complete markets.

Suggested Citation

  • Andreas Müller & Kjetil Storesletten & Fabrizio Zilibotti, 2019. "Sovereign Debt and Structural Reforms," American Economic Review, American Economic Association, vol. 109(12), pages 4220-4259, December.
    • Handle: RePEc:aea:aecrev:v:109:y:2019:i:12:p:4220-59
    Note: DOI: 10.1257/aer.20161457
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/aer.20161457
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20161457.data
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20161457.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/aer.20161457.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pierre C. Boyer & Brian Roberson & Christoph Esslinger, 2024. "Public Debt and the Political Economy of Reforms," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 459-491, August.
    2. Philipp Renner & Karl Schmedders, 2020. "Discrete‐time dynamic principal–agent models: Contraction mapping theorem and computational treatment," Quantitative Economics, Econometric Society, vol. 11(4), pages 1215-1251, November.
    3. Galli, Carlo, 2021. "Self-fulfilling debt crises, fiscal policy and investment," Journal of International Economics, Elsevier, vol. 131(C).
    4. Damiano Sandri, 2018. "Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-Ins, or Bail-Outs?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(4), pages 665-693, December.
    5. Vinci, Francesca & Schang, Christopher, 2024. "Marrying fiscal rules & investment: a central fiscal capacity for Europe," Working Paper Series 2962, European Central Bank.
    6. Ábrahám, Árpád & Brogueira de Sousa, João & Marimon, Ramon & Mayr, Lukas, 2023. "On the design of a European Unemployment Insurance System," European Economic Review, Elsevier, vol. 156(C).
    7. Clausen, Andrew & Strub, Carlo, 2020. "Reverse Calculus and nested optimization," Journal of Economic Theory, Elsevier, vol. 187(C).
    8. Arvai, Kai, 2024. "The political economy of currency unions," Journal of International Economics, Elsevier, vol. 152(C).
    9. Corsetti, Giancarlo & Erce, Aitor & Uy, Timothy, 2018. "Debt Sustainability and the Terms of Official Support," CEPR Discussion Papers 13292, C.E.P.R. Discussion Papers.
    10. Cristina Arellano & Yan Bai & Sandra Lizarazo, 2017. "Sovereign Risk Contagion," NBER Working Papers 24031, National Bureau of Economic Research, Inc.
    11. Shenzhe Jiang & Junjie Xia & Jiajun Xu & Jianye Yan, 2023. "A theory of National Development Bank: long-term investment and the agency problem," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 995-1024, October.
    12. Kai Arvai, 2021. "The Political Economy of Currency Unions," Working papers 850, Banque de France.
    13. Fink, Fabian & Scholl, Almuth, 2016. "A quantitative model of sovereign debt, bailouts and conditionality," Journal of International Economics, Elsevier, vol. 98(C), pages 176-190.
    14. Francesco Carli & Leonor Modesto, 2022. "Sovereign debt, fiscal policy, and macroeconomic instability," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1386-1412, December.
    15. Liu, Yan & Marimon, Ramon & Wicht, Adrien, 2023. "Making sovereign debt safe with a financial stability fund," Journal of International Economics, Elsevier, vol. 145(C).
    16. Matthew Greenblatt, 2020. "Bailouts, Inflation, and Risk-Sharing in Monetary Unions," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(3), pages 269-296, September.
    17. Flavia Corneli, 2024. "Sovereign debt maturity structure and its costs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 262-297, February.
    18. Dal Colle, Alessandra, 2018. "The mechanics of commercial banking liberalization and growth," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 194-203.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:109:y:2019:i:12:p:4220-59. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.