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Commitment and sovereign default risk

Author

Listed:
  • Juan Hatchondo

    (Indiana University)

  • Francisco Roch

    (International Monetary Fund)

  • Leonardo Martinez

    (International Monetary Fund)

Abstract

We solve a sovereign default model with long-term debt assuming that the government can commit to future debt issuances. Comparing model simulations with and without commitment we nd that (i) commitment explains most of the default risk in the simulations of the model without commitment, and (ii) the government wants to commit to a scal policy that is more procyclical than the one in the model without commitment. Welfare gains from commitment can be substantial.

Suggested Citation

  • Juan Hatchondo & Francisco Roch & Leonardo Martinez, 2018. "Commitment and sovereign default risk," 2018 Meeting Papers 927, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:927
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