Abstract
Default risk Alberto Alesina, Mark De Broeck, Alessandro Prati and Guido Tabellini Different European countries pay very different interest rates on their public debts. Will these differences disappear if and when exchange rates come to be irrevocably fixed in the European Monetary Union? Or rather will default risks in the high debt countries keep interest rates from converging? To answer this question, this paper investigates whether a perceived default risk is already priced by the market The paper compares the interest rates on public and private financial instruments denominated in the same currencies in 12 OECD countries. A strong correlation is found between the size of public indebtedness and the spread between public and private rates of return. This correlation suggests that the markets perceive a default risk on the public debt of some OECD countries. The size of this default risk is however very small.
Citations in this library
Stored only when both papers are in the corpus — 295 citations exist upstream.
References
1983Bank Runs, Deposit Insurance, and Liquidity1991Political and Monetary Institutions and Public Financial Policies in the Industrial Countries1989Government Spending and Budget Deficits in the Industrial Countries1985Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation1984LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-801989Servicing the Public Debt: The Role of Expectations* *I have greatly benefited from comments received at Johns Hopkins University, Georgetown University, the Macro Lunch Group of the University of Pennsylvania, MIT, and the Research Department of the International Monetary Fund. I am particularly indebted to Matt Canzoneri, Sara Guerschanik-Calvo, Joseph Harrington, Jr, Elhanan Helpman, Nissan Leviatan, Maury Obstfeld, Assaf Razin, Sweder van Wijnbergen and two anonymous referees. The research on this paper was partly done while I was a visiting scholar at the Research Department of the Internationed Monetary Fund, and it was partially funded by the National Science Foundation. However, any opinions expressed are entirely my own and not those of any of the above institutions. This paper has already been published in the The American Economic Review, 78, 4, September 1988, pp. 647–661.1980Dynamic inconsistency, cooperation and the benevolent dissembling government