Self-Fulfilling Debt Crises, Revisited / Mark Aguiar, Satyajit Chatterjee, Harold Cole, Zachary Stangebye.

Format:

Book

Author/Creator:

Aguiar, Mark.

Contributor:

National Bureau of Economic Research.

Chatterjee, Satyajit.

Cole, Harold.

Stangebye, Zachary.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23312.

NBER working paper series no. w23312

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Self-Fulfilling Debt Crises, Revisited

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a "sudden stop" (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government's incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the one-period debt model, including such crises increase the default probabilities by a factor of five and the spread volatility by a factor of twenty-five.

Notes:

Print version record

April 2017.