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“Beneficial†Delays in Debt Restructuring Negotiations

Listed author(s):
  • Ran Bi
Registered author(s):

    Delays in debt restructuring negotiations are widely regarded as inefficient. This paper argues that delays can allow the economy to recover from a crisis, make more resources available for debt settlement, and enable the negotiating parties to enjoy a larger "cake". Within this context, therefore, delays may be "beneficial". This paper explores this idea by constructing a dynamic model of sovereign default in which debt renegotiation is modeled as a stochastic bargaining game based on Merlo and Wilson's (1995) framework. Quantitative analysis shows that this model can generate an average delay length comparable to that experienced by Argentina in its most recent debt restructuring.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/38.

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    Length: 29
    Date of creation: 01 Feb 2008
    Handle: RePEc:imf:imfwpa:08/38
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    1. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates and the current account," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    2. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    3. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    4. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    5. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, "undated". "Why Do Emerging Economies Borrow Short Term?," Working Papers 308, Barcelona Graduate School of Economics.
    6. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115, pages 403-446.
    7. repec:rus:hseeco:123922 is not listed on IDEAS
    8. Neumeyer, Pablo Andrés & Perri, Fabrizio, 2004. "Business Cycles in Emerging Economies: The Role of Interest Rates," CEPR Discussion Papers 4482, C.E.P.R. Discussion Papers.
    9. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-396, March.
    10. Merlo, Antonio & Wilson, Charles A, 1995. "A Stochastic Model of Sequential Bargaining with Complete Information," Econometrica, Econometric Society, vol. 63(2), pages 371-399, March.
    11. Enrique G. Mendoza & Katherine A. Smith, 2002. "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon," NBER Working Papers 9286, National Bureau of Economic Research, Inc.
    12. Reinhart, Carmen, 2004. "Debt intolerance: Executive summary," MPRA Paper 13398, University Library of Munich, Germany.
    13. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    14. Calvo, Guillermo A & Mendoza, Enrique G, 1996. "Petty Crime and Cruel Punishment: Lessons from the Mexican Debacle," American Economic Review, American Economic Association, vol. 86(2), pages 170-175, May.
    15. Vivian Z. Yue, 2005. "Sovereign Default and Debt Renegotiation," 2005 Meeting Papers 138, Society for Economic Dynamics.
    16. Kenneth Kletzer & Barry J. Eichengreen & Ashoka Mody, 2003. "Crisis Resolution; Next Steps," IMF Working Papers 03/196, International Monetary Fund.
    17. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
    18. Irani Arraiz, 2006. "Default, Settlement, and Repayment History: A Unified Model of Sovereign Debt," 2006 Meeting Papers 217, Society for Economic Dynamics.
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