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Managing Default Risk

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  • Anna Zabai

Abstract

High sovereign debt in advanced economies has recently revived the debate about the role of coordination problems and self-fulfilling beliefs as drivers of sovereign default risk. I show how default risk can be decomposed in a solvency-risk component and a coordination-risk component. I then study how fiscal policy can be effective in managing the risk of coordination and I characterise how the shape of the optimal policy is affected by the presence of this risk: making the deficit contingent on interest rate movements is more effective in managing default risk than using non-contingent fiscal targets.

Suggested Citation

  • Anna Zabai, 2014. "Managing Default Risk," BIS Working Papers 467, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:467
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    References listed on IDEAS

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    Cited by:

    1. Michal Szkup, 2022. "Preventing Self-Fulfilling Debt Crises: A Global Games Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 22-55, January.
    2. Szkup, Michal, 2020. "Multiplier effect and comparative statics in global games of regime change," Theoretical Economics, Econometric Society, vol. 15(2), May.
    3. Szkup, Michal, 2017. "Preventing Self-fulfilling debt crises," MPRA Paper 82754, University Library of Munich, Germany.
    4. Tarashev, Nikola & Zabai, Anna, 2019. "When pegging is a commitment device: Revisiting conventional wisdom about currency crises," Journal of International Economics, Elsevier, vol. 118(C), pages 233-247.
    5. Angeletos, G.-M. & Lian, C., 2016. "Incomplete Information in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1065-1240, Elsevier.

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    Keywords

    Default risk; fiscal policy; coordination; global games.;
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