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International Spillovers and Bailouts

Author

Listed:
  • Marina Azzimonti
  • Vincenzo Quadrini

Abstract

We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in countries that hold its debt, which could justify why a given country may want to bailout another. But why do creditor countries choose to bail out debtor countries instead of their own private sector? We show that this is because an external bailout could be cheaper than a domestic bailout. We also show that, although anticipated bailouts lead to higher borrowing, they can be Pareto improving not only ex-post (after a country has defaulted) but also ex-ante (before the country chooses its debt).

Suggested Citation

  • Marina Azzimonti & Vincenzo Quadrini, 2018. "International Spillovers and Bailouts," NBER Working Papers 25011, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25011
    Note: EFG IFM POL
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    Cited by:

    1. de Ferra, Sergio & Mallucci, Enrico, 2025. "Avoiding sovereign default contagion: A normative analysis," Journal of International Economics, Elsevier, vol. 154(C).
    2. Sewon Hur & César Sosa-Padilla & Zeynep Yom, 2021. "Optimal Bailouts in Banking and Sovereign Crises," Globalization Institute Working Papers 406, Federal Reserve Bank of Dallas, revised 27 Feb 2024.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F3 - International Economics - - International Finance
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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