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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. Harold L. Cole & Timothy J. Kehoe, 1998. "Self-fulfilling debt crises," Staff Report 211, Federal Reserve Bank of Minneapolis.
  2. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," NBER Working Papers 7571, National Bureau of Economic Research, Inc.
  3. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," NBER Working Papers 12783, National Bureau of Economic Research, Inc.
  4. Mark Aguiar & Gita Gopinath, 2004. "Defaultable Debt, Interest Rates and the Current Account," NBER Working Papers 10731, National Bureau of Economic Research, Inc.
  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. Emine Boz, 2009. "Sovereign Default, Private Sector Creditors and the IFIs," IMF Working Papers 09/46, International Monetary Fund.
  7. Mark Bagnoli & Ted Bergstrom, 2005. "Log-concave probability and its applications," Economic Theory, Springer, vol. 26(2), pages 445-469, 08.
  8. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  9. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default in "Bad Times" ?," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 352-360, 04-05.
  10. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages S37-S54.
  11. 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.
  12. 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.
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