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  • Dirk Niepelt

    (Gerzensee; U Bern; IIES, Stockholm U)

  • Harris Dellas

    (University of Bern)

We develop a model with official and private creditors where the probability of sovereign default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay but also carries extra costs such as reduced ex post flexibility. We characterize the equilibrium composition of debt across creditor groups. Our model can account for important features of sovereign debt crises: Namely, that official lending to sovereigns takes place only in times of debt distress, carries a favorable rate and tends to displace private funding. It also offers a novel perspective on the relationship between debt overhang and default risk: The availability of official debt makes default on outstanding debt more likely.

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File URL: https://www.economicdynamics.org/meetpapers/2013/paper_12.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 12.

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Date of creation: 2013
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Handle: RePEc:red:sed013:12
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  1. Niepelt, Dirk, 2008. "Debt Maturity without Commitment," CEPR Discussion Papers 7093, C.E.P.R. Discussion Papers.
  2. Fernando A. Broner & Alberto Martín & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," Working Papers 288, Barcelona Graduate School of Economics.
  3. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  4. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates, and the current account," Working Papers 04-5, Federal Reserve Bank of Boston.
  5. Egil Matsen & Tommy Sveen & Ragnar Torvik, 2004. "Savers, Spenders and Fiscal Policy in a Small Open Economy," Working Paper 2004/18, Norges Bank.
  6. N. Gregory Mankiw, 1999. "The Savers-Spenders Theory of Fiscal Policy," Harvard Institute of Economic Research Working Papers 1888, Harvard - Institute of Economic Research.
  7. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-Fulfilling Debt Crises," Levine's Working Paper Archive 114, David K. Levine.
  8. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default In "Bad Times"?," CAMA Working Papers 2007-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  10. Tirole, Jean, 2012. "Country Solidarity, Private Sector Involvement and the Contagion of Sovereign Crises," IDEI Working Papers 761, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2012.
  11. Emine Boz, 2009. "Sovereign Default, Private Sector Creditors and the IFIs," IMF Working Papers 09/46, International Monetary Fund.
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