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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://dx.doi.org/10.17016/IFDP.2015.1153
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    References listed on IDEAS

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    1. Pablo D'Erasmo & Bora Durdu & Emine Boz, 2014. "Sovereign Risk and Bank Balance Sheets: The Role of Macroprudential Policies," 2014 Meeting Papers 641, Society for Economic Dynamics.
    2. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    3. 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.
    4. Cesar Sosa-Padilla, 2012. "Sovereign Defaults and Banking Crises," Department of Economics Working Papers 2012-09, McMaster University, revised Aug 2015.
    5. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
    6. Kohlscheen, E., 2009. "Domestic vs. External Sovereign Debt Servicing: An Empirical Analysis," Economic Research Papers 271296, University of Warwick - Department of Economics.
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    Blog mentions

    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. Hur, Sewon & Kondo, Illenin O. & Perri, Fabrizio, 2018. "Inflation, Debt, and Default," Working Paper 1812, Federal Reserve Bank of Cleveland.
    2. 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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