Sovereign Debt Crises and Low Interest Rates

On Sovereign Default With Time-Varying Interest Rates

“…The contraction property relies on long-term interest rates exceeding economic growth, and it might fail otherwise. This fact sheds light on the occurrence of sovereign debt crises (multiple equilibria) under low interest rates, an issue studied by Bloise and Vailakis [12].…”

“…This machinery only serves to separate regimes for long-term interest rates without any direct substantive implication. Our objectives in the papers are rather different: in Bloise et al [11] we argue that, at a competitive equilibrium under incomplete markets, debt can be sustained by the reputation for repayment alone; in Bloise and Vailakis [12] we show that low interest rates expose sovereign debt markets to an increased risk of self-fulfilling solvency crises; in this paper we extend and refine Aguiar and Amador [3]'s contraction approach to Eaton and Gersovitz [14]'s equilibrium. The papers are complement and, all together, they suggest that the conditions necessary for contraction are dramatically understated by the (not heuristic) assumption of a constant positive interest rate.…”

“…A time-varying interest rate, recurrently falling below economic growth, reproduces these empirical patterns without necessarily permitting Ponzi games. Under these alternative conditions, sovereign debt markets are prone to self-fulfilling crises (multiple equilibria), as argued by Bloise and Vailakis [12].…”

Monetary-Fiscal Policy Interactions in the Euro Area

“… See Wyplosz (2019) for a discussion of how a deficit bias can counteract the stabilising impact of a negative interest-rate-growth differential on public debt dynamics Bloise and Vailakis (2020). show how a negative interest-rate-growth differential can theoretically give rise to self-fulfilling debt crises that will be absent if the interest rate exceeds the growth rate.130 Note that Chart A displays the averages for the variables across all model-based time series.…”