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Self-Fulfilling Debt Crises, Revisited

Author

Listed:
  • Mark Aguiar
  • Satyajit Chatterjee
  • Harold Cole
  • Zachary Stangebye

Abstract

Lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt and immediate default. We show that the same lack of commitment leads to other possible self-fulfilling crises, including issuance of more debt at depressed prices, or a “sudden stop” (forced austerity) in which debt issuance is sharply curtailed. Both outcomes stem from the government's incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. These outcomes generate a large increase in spread volatility in both a 1-period and a multiperiod quantitative debt model.

Suggested Citation

  • Mark Aguiar & Satyajit Chatterjee & Harold Cole & Zachary Stangebye, 2022. "Self-Fulfilling Debt Crises, Revisited," Journal of Political Economy, University of Chicago Press, vol. 130(5), pages 1147-1183.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/718934
    DOI: 10.1086/718934
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    Cited by:

    1. Mr. Philip Barrett, 2018. "Interest-Growth Differentials and Debt Limits in Advanced Economies," IMF Working Papers 2018/082, International Monetary Fund.
    2. Auerbach, Alan J & Gorodnichenko, Yuriy, 2017. "Fiscal Stimulus and Fiscal Sustainability," Department of Economics, Working Paper Series qt90t9q1mx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Radoslaw Paluszynski, 2023. "Learning about Debt Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(1), pages 106-134, January.
    4. Si Guo & Yun Pei, 2023. "The impact of sovereign defaults on lending countries," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 345-374, January.
    5. Mark Aguiar, 2025. "The Costs and Consequences of Sovereign Borrowing," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 73(1), pages 1-19, March.
    6. Juan Passadore & Juan Xandri, 2019. "Robust Predictions in Dynamic Policy Games," 2019 Meeting Papers 1345, Society for Economic Dynamics.
    7. Saki Bigio & Galo Nuño & Juan Passadore, 2019. "A framework for debt-maturity management," Working Papers 1919, Banco de España.
    8. Prein, Timm, 2019. "Persistent Unemployment, Sovereign Debt Crises, and the Impact of Haircuts," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203654, Verein für Socialpolitik / German Economic Association, revised 2019.
    9. Bloise, Gaetano & Vailakis, Yiannis, 2024. "Sovereign debt crises and low interest rates," Journal of International Economics, Elsevier, vol. 150(C).
    10. Zachary Stangebye, 2023. "Long-Term Sovereign Debt: A Steady State Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 107-131, April.
    11. Mark Aguiar & Manuel Amador, 2020. "Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models," American Economic Review, American Economic Association, vol. 110(9), pages 2783-2818, September.
    12. Joao Ayres & Gaston Navarro & Juan Pablo Nicolini & Pedro Teles, 2019. "Self-Fulfilling Debt Crises with Long Stagnations," Working Papers 757, Federal Reserve Bank of Minneapolis.
    13. Semmler, Willi & Tahri, Ibrahim, 2017. "Current account imbalances: A new approach to assess external debt sustainability," Economic Modelling, Elsevier, vol. 62(C), pages 161-170.
    14. Passadore, Juan & Xu, Yu, 2022. "Illiquidity in sovereign debt markets," Journal of International Economics, Elsevier, vol. 137(C).
    15. Saki Bigio & Galo Nuño & Juan Passadore, 2023. "Debt-Maturity Management with Liquidity Costs," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 119-190.
    16. Chatterjee, Satyajit & Eyigungor, Burcu, 2019. "Endogenous political turnover and fluctuations in sovereign default risk," Journal of International Economics, Elsevier, vol. 117(C), pages 37-50.
    17. Sergey Pekarski & Anna Sokolova, 2021. "Default Costs and Self-fulfilling Fiscal Limits in a Small Open Economy," HSE Working papers WP BRP 243/EC/2021, National Research University Higher School of Economics.
    18. Giancarlo Corsetti & Fred Seunghyun Maeng, 2024. "Debt Crises, Fast and Slow," Journal of the European Economic Association, European Economic Association, vol. 22(5), pages 2148-2179.
    19. Manuel Amador & Christopher Phelan, 2021. "Reputation and Sovereign Default," Econometrica, Econometric Society, vol. 89(4), pages 1979-2010, July.

    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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