IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/16-136.html
   My bibliography  Save this paper

The Dynamics of Sovereign Debt Crises and Bailouts

Author

Listed:
  • Francisco Roch
  • Harald Uhlig

Abstract

Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Suggested Citation

  • Francisco Roch & Harald Uhlig, 2016. "The Dynamics of Sovereign Debt Crises and Bailouts," IMF Working Papers 16/136, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:16/136
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=44077
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fink, Fabian & Scholl, Almuth, 2016. "A quantitative model of sovereign debt, bailouts and conditionality," Journal of International Economics, Elsevier, vol. 98(C), pages 176-190.
    2. Satyajit Chatterjee & Burcu Eyigungor, 2011. "A Quantitative Analysis of the US Housing and Mortgage Markets and the Mortgage Crisis," 2011 Meeting Papers 1109, Society for Economic Dynamics.
    3. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    4. Luzzetti, Matthew N. & Neumuller, Seth, 2016. "Learning and the dynamics of consumer unsecured debt and bankruptcies," Journal of Economic Dynamics and Control, Elsevier, vol. 67(C), pages 22-39.
    5. Cooper, Russell & Kempf, Hubert & Peled, Dan, 2010. "Regional debt in monetary unions: Is it inflationary?," European Economic Review, Elsevier, vol. 54(3), pages 345-358, April.
    6. Ignacio Presno & Demian Pouzo, 2014. "Optimal Taxation with Endogenous Default under Incomplete Markets," 2014 Meeting Papers 689, Society for Economic Dynamics.
    7. 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.
    8. Philippe Bacchetta & Elena Perazzi & Eric van Wincoop, 2015. "Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?," Cahiers de Recherches Economiques du Département d'économie 15.06, Université de Lausanne, Faculté des HEC, Département d’économie.
    9. Satyajit Chatterjee & Burcu Eyigungor, 2015. "A Quantitative Analysis of the US Housing and Mortgage Markets and the Foreclosure Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 165-184, April.
    10. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x.
    11. Juessen, Falko & Schabert, Andreas, 2013. "Fiscal Policy, Sovereign Default, and Bailouts," IZA Discussion Papers 7805, Institute of Labor Economics (IZA).
    12. Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 707-740, December.
    13. repec:bla:jeurec:v:14:y:2016:i:6:p:1329-1371 is not listed on IDEAS
    14. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    15. Kriwoluzky, Alexander & Müller, Gernot J. & Wolf, Martin, 2015. "Exit Expectations and Debt Crises in Currency Unions," IWH Discussion Papers 18/2015, Halle Institute for Economic Research (IWH).
    16. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
    17. repec:spr:joecth:v:64:y:2017:i:4:d:10.1007_s00199-015-0945-0 is not listed on IDEAS
    18. 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.
    19. Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 889-946.
    20. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    21. Boz, Emine, 2011. "Sovereign default, private sector creditors, and the IFIs," Journal of International Economics, Elsevier, vol. 83(1), pages 70-82, January.
    22. Poplawski Ribeiro, Marcos & Beetsma, Roel, 2008. "The political economy of structural reforms under a deficit restriction," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 179-198, March.
    23. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    24. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1697-1755, Elsevier.
    25. Giancarlo Corsetti & Luca Dedola, 2016. "The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 14(6), pages 1329-1371.
    26. Beetsma, Roel & Uhlig, Harald, 1999. "An Analysis of the Stability and Growth Pact," Economic Journal, Royal Economic Society, vol. 109(458), pages 546-571, October.
    27. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2013. "Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises," NBER Working Papers 19516, National Bureau of Economic Research, Inc.
    28. Juan Carlos Conesa & Timothy J. Kehoe, 2014. "Is It Too Late to Bail Out the Troubled Countries in the Eurozone?," American Economic Review, American Economic Association, vol. 104(5), pages 88-93, May.
    29. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
    30. Luigi Bocola & Alessandro Dovis, 2016. "Self-Fulfilling Debt Crises: A Quantitative Analysis," NBER Working Papers 22694, National Bureau of Economic Research, Inc.
    31. Giancarlo Corsetti & Luca Dedola, 2012. "The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises," Discussion Papers 1424, Centre for Macroeconomics (CFM), revised Aug 2014.
    32. Florian Kirsch & Ronald Rühmkorf, 2017. "Sovereign borrowing, financial assistance, and debt repudiation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 777-804, December.
    33. Ariel Zetlin-Jones & Gaetano Gaballo, 2016. "Bailouts, Moral Hazard, and Banks’ Home Bias for Sovereign Debt," 2016 Meeting Papers 876, Society for Economic Dynamics.
    34. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
    35. Kyle F. Herkenhoff & Lee E. Ohanian, 2012. "Foreclosure delay and U.S. unemployment," Working Papers 2012-017, Federal Reserve Bank of St. Louis.
    36. repec:eee:macchp:v2-2493 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Sovereign debt defaults; Euro Area; Financial crises; Debt markets; Private sector; Econometric models; Default; Bailouts; Self-fulfilling Crises; Endogenous Borrowing Constraints; Long-term Debt; OMT; Eurozone Debt Crisis.;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:16/136. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi) The email address of this maintainer does not seem to be valid anymore. Please ask Hassan Zaidi to update the entry or send us the correct email address. General contact details of provider: http://edirc.repec.org/data/imfffus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.