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International Spillovers and Bailouts

Author

Listed:
  • Marina Azzimonti
  • Vincenzo Quadrini

Abstract

We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in other countries, which motivates a bailout. But why do creditor countries choose to bailout debtor countries instead of their own private sector? We show that this is because an external bailout could be cheaper than a domestic bailout. We also show that although anticipated bailouts lead to higher borrowing, they can be Pareto improving not only ex post (after a country has defaulted) but also ex ante (before the country chooses its debt).

Suggested Citation

  • Marina Azzimonti & Vincenzo Quadrini, 2024. "International Spillovers and Bailouts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 77-128.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:1:p:77-128.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad025
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