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Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal

Listed author(s):
  • Mark Aguiar
  • Satyajit Chatterjee
  • Harold Cole
  • Zachary Stangebye

We revisit self-fulfilling rollover crises by introducing an alternative equilibrium selection that involves bond auctions at depressed but strictly positive equilibrium prices, a scenario in line with observed sovereign debt crises. We refer to these auctions as “desperate deals,” the defining feature of which is a price schedule that makes the government indifferent to default or repayment. The government randomizes at the time of repayment, which we show can be implemented in pure strategies by introducing stochastic political payoffs or external bailouts. Quantitatively, auctions at fire-sale prices are crucial for generating realistic spread volatility.

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File URL: http://www.nber.org/papers/w23312.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23312.

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Date of creation: Apr 2017
Handle: RePEc:nbr:nberwo:23312
Note: EFG IFM
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  1. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
  2. 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.
  3. Alessandro Dovis & Luigi Bocola, 2016. "Self_fulfilling Debt Crises: A Quantitative Analysis," 2016 Meeting Papers 1218, Society for Economic Dynamics.
  4. Francisco Roch & Harald Uhlig, 2016. "The Dynamics of Sovereign Debt Crises and Bailouts," IMF Working Papers 16/136, International Monetary Fund.
  5. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, vol. 83(2), pages 243-254, March.
  6. Luigi Bocola & Alessandro Dovis, 2016. "Self-Fulfilling Debt Crises: A Quantitative Analysis," NBER Working Papers 22694, National Bureau of Economic Research, Inc.
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