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Self_fulfilling Debt Crises: A Quantitative Analysis

Author

Listed:
  • Alessandro Dovis

    (Pennsylvania State University)

  • Luigi Bocola

    (Northwestern University)

Abstract

This paper uses the information contained in the joint dynamics of government’s debt maturity choices and interest rate spreads to quantify the importance of self- fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk averse lenders and self-fulfilling rollover crises aÌ la Cole and Kehoe (2000). In this environment, interest rate spreads are driven by economic fundamentals and by expectations of future self-fulfilling defaults. These sources of default risk have contrasting implications for the government’s debt maturity choices. Therefore, they can be indirectly inferred by tracking the evolution of the maturity structure of debt during a crisis. We fit the model to the Italian debt crisis of 2008-2012, finding that rollover risk accounted for 20% of the movements in spreads over this episode. Our results have implications for the effects of the liquidity provisions established by the European Central Bank during the summer of 2012.

Suggested Citation

  • Alessandro Dovis & Luigi Bocola, 2016. "Self_fulfilling Debt Crises: A Quantitative Analysis," 2016 Meeting Papers 1218, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1218
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    References listed on IDEAS

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    1. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    2. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
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    Citations

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    Cited by:

    1. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, American Economic Association, vol. 108(9), pages 2629-2670, September.
    2. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
    3. Gomez-Gonzalez, Patricia, 2019. "Inflation-linked public debt in emerging economies," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 313-334.
    4. Guillermo Ordonez & Daniel Neuhann & Harold Cole, 2014. "Debt Crises: For Whom the Bell Tolls," 2014 Meeting Papers 1245, Society for Economic Dynamics.
    5. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1697-1755, Elsevier.
    6. Cristina Arellano & Luigi Bocola & Yan Bai, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    7. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2018. "Optimal Fiscal Policy without Commitment: Beyond Lucas-Stokey," NBER Working Papers 24522, National Bureau of Economic Research, Inc.
    8. Joao Luiz Ayres & Pedro Teles & Gaston Navarro & Juan Pablo Nicolini, 2019. "Self-Fulfilling Debt Crises with Long Stagnations," Working Papers 757, Federal Reserve Bank of Minneapolis, revised 18 Apr 2019.
    9. Michael Stiefel & Rémi Vivès, 2019. "“Whatever it Takes” to Change Belief: Evidence from Twitter," AMSE Working Papers 1907, Aix-Marseille School of Economics, France, revised Mar 2019.
    10. Satyajit Chatterjee & Harold L. Cole & Mark Aguiar & Zachary Stangebye, 2020. "Self-Fulfilling Debt Crises, Revisited," Working Papers 20-03, Federal Reserve Bank of Philadelphia, revised 22 Jan 2020.
    11. Szkup, Michal, 2017. "Preventing Self-fulfilling debt crises," MPRA Paper 82754, University Library of Munich, Germany.
    12. Perez, Diego J., 2017. "Sovereign debt maturity structure under asymmetric information," Journal of International Economics, Elsevier, vol. 108(C), pages 243-259.
    13. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2020. "Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey," Working Papers 1144, Barcelona Graduate School of Economics.
    14. Paula Margaretic & Sebastián Becerra, 2017. "Dispersed Information and Sovereign Risk Premia," Working Papers Central Bank of Chile 808, Central Bank of Chile.
    15. Bocola, Luigi & Bornstein, Gideon & Dovis, Alessandro, 2019. "Quantitative sovereign default models and the European debt crisis," Journal of International Economics, Elsevier, vol. 118(C), pages 20-30.
    16. Gonzalo Fernandez-de-Cordoba & Pau Pujolas & Jose Torres, 2017. "Fiscal Discipline and Defaults," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 1-13, March.
    17. Cristina Arellano & Yan Bai & Sandra Lizarazo, 2017. "Sovereign Risk Contagion," NBER Working Papers 24031, National Bureau of Economic Research, Inc.
    18. Juan Carlos Conesa & Timothy J. Kehoe, 2017. "Gambling for redemption and self-fulfilling debt crises," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(4), pages 707-740, December.
    19. Mark Aguiar & Satyajit Chatterjee & Harold Cole & Zachary Stangebye, 2017. "Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal," NBER Working Papers 23312, National Bureau of Economic Research, Inc.
    20. Occhino, Filippo, 2017. "The 2012 eurozone crisis and the ECB’s OMT program: A debt-overhang banking and sovereign crisis interpretation," European Economic Review, Elsevier, vol. 100(C), pages 337-363.
    21. Guillermo Ordonez & Daniel Neuhann & Harold Cole, 2017. "A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information," 2017 Meeting Papers 787, Society for Economic Dynamics.
    22. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.
    23. Elena Mattana & Ettore Panetti, 2017. "The Welfare Costs of Self-Fulfilling Bank Runs," Working Papers REM 2017/17, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    24. Semmler, Willi & Tahri, Ibrahim, 2017. "Current account imbalances: A new approach to assess external debt sustainability," Economic Modelling, Elsevier, vol. 62(C), pages 161-170.
    25. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2019. "Optimal fiscal policy without commitment: Revisiting Lucas-Stokey," Economics Working Papers 1687, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2020.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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