Self-Fulfilling Debt Crises: A Quantitative Analysis / Luigi Bocola, Alessandro Dovis.

Format:

Book

Author/Creator:

Bocola, Luigi.

Contributor:

National Bureau of Economic Research.

Dovis, Alessandro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22694.

NBER working paper series no. w22694

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Self-Fulfilling Debt Crises

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

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 á 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 two sources of default risk have contrasting implications for the debt maturity choices of the government. 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 12% of the spreads over this episode were due to rollover risk. Our results have implications for the effects of the liquidity provisions established by the European Central Bank during the summer of 2012.

Notes:

Print version record

September 2016.