Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

D’Erasmo, Pablo; Mendoza, Enrique G.

doi:10.3386/w19477

Cited by 12 publications

(4 citation statements)

References 19 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…The alternative choice for governments in distress is to adopt a creditor-friendly stance, by continuing debt payments to foreign banks and bondholders and by demanding low haircuts (little debt relief). This strategy may mitigate the negative reputational effects of a default, but will shift the burden to the domestic population, which can expect higher taxes and less transfers during and after the default spell (D'Erasmo and Mendoza, 2016).…”

Section: Introductionmentioning

confidence: 99%

The output costs of hard and soft sovereign default

Trebesch¹,

Zabel

2017

European Economic Review

View full text Add to dashboard Cite

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. How costly are sovereign debt crises? In this paper we study output losses during sovereign default and debt renegotiation episodes since 1980. In contrast to previous work, we account for the severity of default and not only for its occurrence. Specifically, we distinguish between "hard" and "soft" defaults, using new data on debtor payment and negotiation behavior and on the size of haircuts towards private external creditors. We show that hard defaults are associated with a much steeper drop in GDP, of up to ten percent, compared to soft defaults, and address concerns of reverse causality and omitted variable bias. The results question the standard assumption that defaults trigger fixed and lump-sum costs. Instead, our findings are consistent with models assuming proportional output costs of default. Terms of use: Documents in EconStor mayJEL-Codes: F340, F410, H630, G010.

show abstract

Section: Introductionmentioning

confidence: 99%

The output costs of hard and soft sovereign default

Trebesch¹,

Zabel

2017

European Economic Review

View full text Add to dashboard Cite

show abstract

“…7 This stands in contrast to recent theory papers like Guembel andSussmann (2009) andBroner et al (2014) who effectively assume that domestic creditors have "more teeth" since they can punish their own government in elections. We agree with Drazen (1998) that the direction of discrimination is far from clear-cut and that foreign creditors can also exert political influence (see also Farhi andTirole 2014, andD'Erasmo andMendoza 2015). 8 We repeatedly stress public plus private debt, as what are private debts before a crisis often become public debt after the crisis, as noted by Diaz-Alejandro (1985).…”

Section: Balance Sheet Effectsmentioning

confidence: 88%

The Pitfalls of External Dependence: Greece, 1829–2015

Reinhart¹,

Trebesch²

2015

Brookings Papers on Economic Activity

View full text Add to dashboard Cite

Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors -with striking historical parallels. Each crisis is preceded by a period of heavy borrowing from foreign private creditors. As repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans. Political interference from abroad mounts and a prolonged episode of debt overhang and financial autarky follows. We conclude that these cycles of external debt and dependence are a perennial theme of Greek history, as well as in other countries that have been "addicted" to foreign savings. * We wish to thank

show abstract

“…Following a large body of the literature (i.e., D'Erasmo et al, 2014;and Guerrieri et al, 2013), it is assumed that investors are subject to a capital constraint. The capital constraint introduces a link between the supply of credit and the value of investors' net worth:…”

Section: Investors' Problemmentioning

confidence: 99%

Domestic Debt and Sovereign Defaults

Mallucci¹

2021

J of Money Credit Banking

View full text Add to dashboard Cite

This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings of government debt weaken investors' balance sheets and induce a contraction of credit and output upon default. I calibrate the model to the Argentinean economy and show that the model reproduces key empirical moments. Introducing domestic debt also yields relevant normative implications. While domestic debt is crucial to determining the risk of default, the efficient internal-external composition of debt cannot be achieved without government intervention. Pigouvian subsidies can restore efficiency.

show abstract

Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default

Cited by 12 publications

References 19 publications

The output costs of hard and soft sovereign default

The output costs of hard and soft sovereign default

The Pitfalls of External Dependence: Greece, 1829–2015

Domestic Debt and Sovereign Defaults

Contact Info

Product

Resources

About