History Remembered: Optimal Sovereign Default on Domestic and External Debt / Pablo D'Erasmo, Enrique G. Mendoza.

Format:

Book

Author/Creator:

D'Erasmo, Pablo.

Contributor:

National Bureau of Economic Research.

Mendoza, Enrique G.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25073.

NBER working paper series no. w25073

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

History Remembered

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in Macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives v. the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency), and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply.

Notes:

Print version record

September 2018.