Gambling for redemption and self-fulfilling debt crises

Conesa, Juan Carlos; Kehoe, Timothy J.

doi:10.1007/s00199-017-1085-5

Cited by 55 publications

(41 citation statements)

References 32 publications

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“…This seems not to do with debt management but more tackling financial market disruptions that we, as does the rest of the literature, abstract from. Introducing self-fulfilling debt crises, as in Conesa and Kehoe (2017), in our model would justify that in periods when a debt crisis may occur the government purchases its own bonds while in other periods bond issuance is governed by the mechanisms we describe in the paper.…”

Section: Optimal Debt Managementmentioning

confidence: 99%

Government Debt Management: The Long and the Short of It

Faraglia

Marcet

Oikonomou

et al. 2018

The Review of Economic Studies

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Standard optimal Debt Management (DM) models prescribe a dominant role for long bonds and advocate against issuing short bonds. They require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue (r/r) new ones. These features of DM are inconsistent with U.S. data. We introduce incomplete markets via small transaction costs which serves to make optimal DM more closely resemble the data : r/r are negligible, short bond issuance substantial and persistent and short and long bonds positively co-vary. Intuitively, long bonds help smooth taxes over states and short bonds over time. Solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions.

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Section: Optimal Debt Managementmentioning

confidence: 99%

Government Debt Management: The Long and the Short of It

Faraglia

Marcet

Oikonomou

et al. 2018

The Review of Economic Studies

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“…Agreement was reached after the Presidential elections of 2013. The outgoing Government was ''gambling for redemption'' (Conesa and Kehoe 2015) but the debt envelope was increasing making a crisis inevitable. Central Bank Governor Orphanides, in a joint letter with ECB Governor Jean-Claude Trichet on 15 Dec. 2010 urged President Christofias to take measures ''in view of the large size of the Cypriot banking system, which may produce negative feedback loops between the financial sector and public debt''.…”

Section: Some Words On the Banking Sectormentioning

confidence: 99%

Fairness and reflexivity in the Cyprus bail-in

Zenios

2015

Empirica

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The Cyprus debt crisis provides some unique lessons. By the time an assistance program was agreed with the Troika of international lenders, the problem had become so complex that a depositor bail-in was implemented to safeguard financial stability. The bail-in was an ad hoc solution applied for the first time in the eurozone but is now the blueprint for dealing with future banking crises. This paper examines the events for the 18-month period before the two eurogroup meetings on Cyprus in March 2013, and the resolution and restructuring of the two systemic banks of the country with depositor bail-in. We show how delays in dealing with the crisis exacerbated the problem but also how the tools brought into solve the problem had significant unintended consequences that fit the reflexivity principle. Available evidence questions the validity of confidential studies guiding the policy decisions on depositor haircut and supports the argument that the bail-in, as implemented in Cyprus, violated international principles of fairness. We use the analysis to draw some lessons on the use of bail-in for future crises. JEL Classification

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“…They do not study reform e¤ort nor do they analyze the case of sovereign debt issued by a country in recession. Conesa and Kehoe (2015) construct a theory predicting that the government of the borrowing country may opt to "gamble for redemption. "Namely, it runs an irresponsible …scal policy that sends the economy into the default zone if the recovery does not happen soon enough.…”

Section: Literature Reviewmentioning

confidence: 99%

Sovereign Debt and Structural Reforms

Müller

Storesletten

Zilibotti

2019

American Economic Review

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We construct a dynamic theory of sovereign debt and structural reforms with limited enforcement and moral hazard. A sovereign country in recession wishes to smooth consumption. It can also undertake costly reforms to speed up recovery. The sovereign can renege on contracts by suffering a stochastic cost. The constrained optimal allocation (COA) prescribes imperfect insurance with non-monotonic dynamics for consumption and effort. The COA is decentralized by a competitive equilibrium with markets for renegotiable GDP-linked one-period debt. The equilibrium features debt overhang: reform effort decreases in a high debt range. We also consider environments with less complete markets. (JEL D82, E21, E23, E32, F34, H63)

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Gambling for redemption and self-fulfilling debt crises

Cited by 55 publications

References 32 publications

Government Debt Management: The Long and the Short of It

Government Debt Management: The Long and the Short of It

Fairness and reflexivity in the Cyprus bail-in

Sovereign Debt and Structural Reforms

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