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Sovereign Default Triggered by Inability to Repay Debt

Author

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  • Michinao Okachi

    (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Department of Economics, Graduate School of Economics and Management, Tohoku University, E-mail: michinao.okachi.e5@tohoku.ac.jp))

Abstract

The Greek sovereign default episode in 2012 was characterized by its high debt-to-GDP ratio and the severe economic contraction following the default. Conventional strategic default models designed to analyze a government's incentive to default often fail to replicate these characteristics. To address this issue, we provide a dynamic stochastic general equilibrium (DSGE) model where a sovereign default is triggered by the government's inability to repay its debt. We show that the inability-to-repay model replicates the empirical features observed in Greece, while the conventional strategic default model calibrated to the Greek economy does not.

Suggested Citation

  • Michinao Okachi, 2019. "Sovereign Default Triggered by Inability to Repay Debt," IMES Discussion Paper Series 19-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:19-e-10
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign Default; Dynamic Stochastic General Equilibrium; Inability to Repay Debt; Strategic Decision to Default; Fiscal Limit; Laffer Curve;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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