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Domestic Debt and Sovereign Defaults

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  • Enrico Mallucci

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.

Suggested Citation

  • Enrico Mallucci, 2015. "Domestic Debt and Sovereign Defaults," International Finance Discussion Papers 1153, Board of Governors of the Federal Reserve System (U.S.), revised 18 Dec 2015.
    • Handle: RePEc:fip:fedgif:1153
    DOI: 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.
    2. 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.
    3. 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.
    4. Sosa-Padilla, César, 2018. "Sovereign defaults and banking crises," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 88-105.
    5. Emanuel Kohlscheen, 2010. "Domestic vs external sovereign debt servicing: an empirical analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 93-103.
    6. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
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    Citations

    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

    Citations

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    Cited by:

    1. Aitor Erce, 2012. "Selective sovereign defaults," Globalization Institute Working Papers 127, Federal Reserve Bank of Dallas, revised 2012.
    2. Di Casola, Paola & Sichlimiris, Spyridon, 2017. "Domestic and External Sovereign Debt," Working Paper Series 345, Sveriges Riksbank (Central Bank of Sweden).
    3. Sosa-Padilla, César, 2018. "Sovereign defaults and banking crises," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 88-105.
    4. Illenin Kondo & Fabrizio Perri & Sewon Hur, 2016. "Inflation, Debt, and Default," 2016 Meeting Papers 1610, Society for Economic Dynamics.
    5. Hur, Sewon & Kondo, Illenin & Perri, Fabrizio, 2018. "Real Interest Rates, Inflation, and Default," CEPR Discussion Papers 13388, C.E.P.R. Discussion Papers.
    6. Flavia Corneli, 2018. "Sovereign debt maturity structure and its costs," Temi di discussione (Economic working papers) 1196, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

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

    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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