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Public Debt, Bailouts and Common Bonds

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  • Kalamov, Zarko
  • Staal, Klaas

Abstract

We look at a model where countries of di fferent size provide local public goods with positive spillovers. Matching grants can induce socially-e fficient expenditure levels, but countries can induce bailouts. We consider the characteristics of these bailouts in a subgame-perfect Nash equilibrium and how these characteristics are a ffected by the introduction of common bonds. Partial substitution of common for sovereign bonds has two implications. First, it lowers the average and marginal borrowing costs of countries, which may be eligible for bailouts. This eff ect leads to higher borrowing in these countries irrespective of their bailout expectations. Second, the lower borrowing costs mitigate the incentives of countries to induce a bailout and, therefore, constrain parameter set for which a soft budget constraint equilibrium exists.

Suggested Citation

  • Kalamov, Zarko & Staal, Klaas, 2015. "Public Debt, Bailouts and Common Bonds," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112979, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:112979
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    JEL classification:

    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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