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Linkages across sovereign debt markets

Author

Listed:
  • Yan Bai

    (University of Rochester)

  • Cristina Arellano

    (Federal Reserve Bank of Minneapolis)

Abstract

This paper studies linkages across sovereign debt markets when debt is unenforceable and countries choose to default and renegotiate. In the model countries are linked to one another by borrowing from a common lender. Borrowing from a common lender connects borrowing rates across countries as well as the renegotiation arrangements. Default of one country lowers the lenderÂ’s wealth which in turn increases the borrowing rate for the other countries. Higher interest rates could then lead to a second default and an even lower wealth for the lender. Foreseeing these events, the lender accepts a lenient haircut from the Â…rst defaulter country. The model can rationalize some of the recent events in Europe.

Suggested Citation

  • Yan Bai & Cristina Arellano, 2012. "Linkages across sovereign debt markets," 2012 Meeting Papers 414, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:414
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    References listed on IDEAS

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    Cited by:

    1. Engler, Philipp & Große Steffen, Christoph, 2016. "Sovereign risk, interbank freezes, and aggregate fluctuations," European Economic Review, Elsevier, vol. 87(C), pages 34-61.
    2. Welburn, Jonathan William & Hausken, Kjell, 2015. "A Game-Theoretic Model with Empirics of Economic Crises," UiS Working Papers in Economics and Finance 2015/7, University of Stavanger.
    3. Park, JungJae, 2013. "Contagion of Sovereign Default Risk: the Role of Two Financial Frictions," MPRA Paper 55197, University Library of Munich, Germany.
    4. Welburn, Jonathan & Hausken, Kjell, 2014. "Game-Theoretic Perspectives on Financial Crises," UiS Working Papers in Economics and Finance 2014/22, University of Stavanger.
    5. Anubha Goel & Aparna Mehra, 2019. "Analyzing Contagion Effect in Markets During Financial Crisis Using Stochastic Autoregressive Canonical Vine Model," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 921-950, March.
    6. Canhui Hong, 2018. "Flight-to-quality debt crises," 2018 Meeting Papers 166, Society for Economic Dynamics.
    7. Brutti, Filippo & Sauré, Philip, 2015. "Transmission of sovereign risk in the Euro crisis," Journal of International Economics, Elsevier, vol. 97(2), pages 231-248.
    8. Saleem Bahaj, 2014. "Systemic Sovereign Risk: Macroeconomic Implications in the Euro Area," Discussion Papers 1406, Centre for Macroeconomics (CFM).
    9. Jonathan William Welburn & Kjell Hausken, 2017. "Game Theoretic Modeling of Economic Systems and the European Debt Crisis," Computational Economics, Springer;Society for Computational Economics, vol. 49(2), pages 177-226, February.
    10. Jonathan W. Welburn, 2020. "Crises Beyond Belief: Findings on Contagion, the Role of Beliefs, and the Eurozone Debt Crisis from a Borrower–Lender Game," Computational Economics, Springer;Society for Computational Economics, vol. 56(2), pages 263-317, August.
    11. Welburn, Jonathan W. & Hausken, Kjell, 2015. "A game theoretic model of economic crises," Applied Mathematics and Computation, Elsevier, vol. 266(C), pages 738-762.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G01 - Financial Economics - - General - - - Financial Crises

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