A model of sovereign debt with private information

Phan, Toàn

doi:10.1016/j.jedc.2017.07.011

Cited by 6 publications

(3 citation statements)

References 26 publications

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“…In particular, Yeyati and Panizza (2011) suggest that output contractions tend to precede defaults indicating that default anticipations drives the costs of default. The paper is also related to the growing theoretical literature on sovereign debt, including, for example, Eaton and Gersovitz (1981), Bulow and Rogoff (1989), Aguiar and Gopinath (2006), Arellano (2008), Mendoza and Yue (2012), Perez (2015), Bocola (2016), and Phan (2016, 2017a.…”

Section: Rican Manufacturing Industriesmentioning

confidence: 99%

The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Chari¹,

Leary²,

Phan³

2018

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Puerto Rico's unique characteristics as a U.S. territory allow us to examine the transmission of quasi-sovereign default risk to the real economy. We document a negative relationship between increased default probabilities and employment growth in government-demand-dependent industries. The negative relationship strengthens when the government undertakes austerity measures. In addition, fiscal austerity reduces output growth via a local fiscal multiplier effect. Overall, we provide evidence for a novel demand-driven transmission mechanism of sovereign default risk that operates through austerity risk and government demand dependence.

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Section: Rican Manufacturing Industriesmentioning

confidence: 99%

The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Chari¹,

Leary²,

Phan³

2018

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“… See Canzoneri (1985) for an application of theGreen and Porter (1984) result to monetary policy.3 FollowingCole et al (1995), important recent contributions includeSandleris (2008), D'Erasmo (2011),Perez (2017),Phan (2017), andDovis (2019) Gibert (2016). is closest to our work in terms of motivation, explicitly treating austerity as a signalling device.4 The case where investment increases collateral is well understood(Obstfeld and Rogoff, 1996, ch.…”

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confidence: 95%

Austerity

Dellas

Niepelt

2020

The Economic Journal

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We study the optimal debt and investment decisions of a sovereign with private information. The separating equilibrium is characterized by a cap on the current account. A sovereign repays debt amount due that exceeds default costs in order to signal creditworthiness and smooth consumption. Accepting funding conditional on investment/reforms relaxes borrowing constraints, even when investment does not create collateral, but it depresses current consumption. The model contains the signalling elements emphasized by creditors in the Greek austerity programs and is consistent with the reduction in the loans issued by Greece and their interest rate following the 2015 election.

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“…99 See also Paluszynski (2017) for an analysis of how introducing learning about fundamental shocks improves the performance of the standard sovereign debt model during the European debt crisis. Other papers that deal with the effects of private information in investment, restructuring, debt sustainability, and maturity structure are Sandleris (2008), Bai and Zhang (2012), Phan (2017), and Perez (2017). …”

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confidence: 99%

Reputation and Sovereign Default

Amador

Phelan

2021

ECTA

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This paper presents a continuous‐time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a commitment type, which cannot default, and an opportunistic type, which can, and where we assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. In any Markov equilibrium, the opportunistic type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. The equilibrium features a “graduation date”: a finite amount of time since the last default, after which time reputation reaches its highest level and is unaffected by not defaulting. Before such date, not defaulting always increases the country's reputation. For countries that have recently defaulted, bond prices and the total amount of debt are increasing functions of the amount of time since the country's last default. For countries that have not recently defaulted (i.e., those that have graduated), bond prices are constant.

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A model of sovereign debt with private information

Cited by 6 publications

References 26 publications

The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Austerity

Reputation and Sovereign Default

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