A simple model of multiple equilibria and default

Daniel Gros

42 citations0/0 files storedSSRN Electronic Journal

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Global Financial Crisis and Policies Fiscal Policies and Political Economy Credit Risk and Financial Regulations

Abstract

This paper presents a simple model that incorporates two types of sovereign default cost: first, a lump-sum cost due to the fact that the country does not service its debt fully and is recognised as being in default status, by ratings agencies, for example. Second, a cost that increases with the size of the losses (or haircut) imposed on creditors whose resistance to a haircut increases with the proportional loss inflicted upon them. One immediate implication of the model is that under some circumstances the creditors have a (collective) interest to forgive some debt in order to induce the country not to default. The model exhibits a potential for multiple equilibria, given that a higher interest rate charged by investors increases the debt service burden and thus the temptation to default. Under very high debt levels, credit rationing can set in as the feedback loop between higher interest rates and the higher incentive to default can become explosive. The introduction of uncertainty makes multiple equilibria less likely and reduces their range.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 42 citations exist upstream.

References

1995Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks 1984Rational and Self-Fulfilling Balance-of-Payments Crises 1989Servicing 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. 647–661.2009Sovereign default and debt renegotiation 1996The Collapse of the Mexican Peso: What Have We Learned?1989Market-Based Debt-Reduction Schemes 2008The Costs of Sovereign Default

Cited by

2015Heterogeneous Market Beliefs, Fundamentals and the Sovereign Debt Crisis in the Eurozone 2021Sovereign Debt in the 21st Century 2014The Future of the E urozone

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.