Renegotiation Policies in Sovereign Defaults
This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing renegotiation processes that treat countries in isolation can prevent contagion of debt crises.
|Date of creation:||10 Jan 2014|
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|Note:||Forthcoming In: American Economic Review Papers and Proceedings|
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Angelini, Paolo & Neri, Stefano & Panetta, Fabio, 2012.
"Monetary and macroprudential policies,"
Working Paper Series
1449, European Central Bank.
- Pablo D'Erasmo & Enrique G. Mendoza, 2013. "Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default," NBER Working Papers 19477, National Bureau of Economic Research, Inc.
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