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Making Sovereign Debt Safe with a Financial Stability Fund

Author

Listed:
  • Adrien Wicht
  • Yan Liu
  • Ramon Marimon

Abstract

We develop an optimal design of a Financial Stability Fund that coexists with the international debt market. The sovereign can borrow long-term defaultable bonds on the private international market, while having with the Fund a long-term contingent contracts subject to limited enforcement constraints. There is a contract that minimizes the debt absorbed by the Fund, guaranteeing full debt stabilization. In equilibrium, the seniority of the Fund contract, with respect to the privately held debt, is irrelevant. We calibrate our model to the Italian economy and show it would have been a more efficient path of debt accumulation with the Fund.

Suggested Citation

  • Adrien Wicht & Yan Liu & Ramon Marimon, 2022. "Making Sovereign Debt Safe with a Financial Stability Fund," Working Papers 1331, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1331
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    Cited by:

    1. Mateos-Planas, Xavier & McCrary, Sean & Ríos-Rull, José-Víctor & Wicht, Adrien, 2025. "Commitment in the canonical sovereign default model," Journal of International Economics, Elsevier, vol. 157(C).
    2. Giovanni Callegari & Ramon Marimon & Adrien Wicht & Luca Zavalloni, 2023. "On a Lender of Last Resort with a Central Bank and a Stability Fund," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 50, pages 106-130, October.
    3. Ruiz, Yomara & Aguirre, Nikolay & Ponce, Pablo & Álvarez-García, José, 2025. "Differential impact of natural resource revenues on global public debt: A quantile regression approach," Resources Policy, Elsevier, vol. 100(C).
    4. Wicht, Adrien, 2025. "Seniority and sovereign default: The role of official multilateral lenders," Journal of International Economics, Elsevier, vol. 155(C).
    5. Maideu-Morera, Gerard, 2024. "Optimal Fiscal Rules and Macroprudential Policies with Sovereign Default Risk," TSE Working Papers 24-1534, Toulouse School of Economics (TSE).

    More about this item

    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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