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Domestic Debt and Sovereign Defaults

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Abstract

This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings of government debt weaken investors' balance sheets and induce a contraction of credit and output upon default. I calibrate the model to the Argentinean economy and show that the model reproduces key empirical moments. Introducing domestic debt also yields relevant normative implications. While domestic debt is crucial to determining the risk of default, the efficient internal-external composition of debt cannot be achieved without government intervention. Pigouvian subsidies can restore efficiency.

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  • Mallucci, Enrico, 2015. "Domestic Debt and Sovereign Defaults," International Finance Discussion Papers 1153, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1153
    DOI: 10.17016/IFDP.2015.1153
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    File URL: http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1153.pdf
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    File URL: http://dx.doi.org/10.17016/IFDP.2015.1153
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    References listed on IDEAS

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    1. Broner, Fernando & Erce, Aitor & Martin, Alberto & Ventura, Jaume, 2014. "Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 114-142.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Domestic Debt and Sovereign Defaults
      by Christian Zimmermann in NEP-DGE blog on 2016-03-20 03:02:55

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    Cited by:

    1. Di Casola, Paola & Sichlimiris, Spyridon, 2017. "Domestic and External Sovereign Debt," Working Paper Series 345, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    Sovereign Defaults; Domestic Debt; Debt Crises; Credit Market;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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