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Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt

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  • Juan Carlos Hatchondo
  • Leonardo Martinez

Abstract

We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances off increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.

Suggested Citation

  • Juan Carlos Hatchondo & Leonardo Martinez, 2013. "Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 217-228, June.
  • Handle: RePEc:taf:intecj:v:27:y:2013:i:2:p:217-228
    DOI: 10.1080/10168737.2013.796112
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    1. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    2. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    3. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 919-933, October.
    4. Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 187-232.
    5. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, American Economic Association, vol. 108(9), pages 2629-2670, September.
    6. Fernando A. Broner & Guido Lorenzoni & Sergio L. Schmukler, 2013. "Why Do Emerging Economies Borrow Short Term?," Journal of the European Economic Association, European Economic Association, vol. 11, pages 67-100, January.
    7. Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 889-946.
    8. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
    9. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-2699, October.
    10. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    11. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    12. Olivier Jeanne & Romain Rancière, 2011. "The Optimal Level of International Reserves For Emerging Market Countries: A New Formula and Some Applications," Economic Journal, Royal Economic Society, vol. 121(555), pages 905-930, September.
    13. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    14. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    15. Juan Carlos Hatchondo & Cesar Sosa-Padilla & Leonardo Martinez, 2010. "Debt dilution, overborrowing, and sovereign default risk," 2010 Meeting Papers 481, Society for Economic Dynamics.
    16. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
    17. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    18. Leonardo Martinez & Horacio Sapriza & Juan Carlos Hatchondo, 2010. "Quantitative properties of sovereign default models; solution methods matter," IMF Working Papers 2010/100, International Monetary Fund.
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    Cited by:

    1. Nicolas Huchet & Bénédicte Serbini, 2013. "Public finance, banking sector and sovereign bond risk premiums in the Eurozone," Post-Print hal-03124168, HAL.
    2. Maximiliano Dvorkin & Emircan Yurdagul & Horacio Sapriza & Juan Sanchez, 2018. "Sovereign Debt Restructuring: A Dynamic Discrete Choice Approach," 2018 Meeting Papers 1273, Society for Economic Dynamics.
    3. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    4. Maximiliano Dvorkin & Juan M. Sanchez & Horacio Sapriza & Emircan Yurdagul, 2018. "Sovereign Debt Restructurings," Working Papers 2018-13, Federal Reserve Bank of St. Louis.
    5. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    6. Hatchondo, Juan Carlos & Martinez, Leonardo & Onder, Yasin Kursat, 2017. "Non-defaultable debt and sovereign risk," Journal of International Economics, Elsevier, vol. 105(C), pages 217-229.
    7. Sánchez, Juan M. & Sapriza, Horacio & Yurdagul, Emircan, 2018. "Sovereign default and maturity choice," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 72-85.
    8. Burriel, Pablo & Checherita-Westphal, Cristina & Jacquinot, Pascal & Stähler, Nikolai & Schön, Matthias, 2020. "Economic consequences of high public debt: evidence from three large scale DSGE models," Working Paper Series 2450, European Central Bank.
    9. Hatchondo, Juan Carlos & Martinez, Leonardo & Sosa Padilla, César, 2014. "Voluntary sovereign debt exchanges," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 32-50.
    10. Juan Hatchondo & Francisco Roch & Leonardo Martinez, 2019. "Constrained efficient borrowing with sovereign default risk," 2019 Meeting Papers 899, Society for Economic Dynamics.
    11. Marcos González-Fernández & Carmen González-Velasco, 2018. "Bond Yields, Sovereign Risk and Maturity Structure," Risks, MDPI, Open Access Journal, vol. 6(4), pages 1-25, September.

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