Self Fulfilling Debt Crisis in an Oil Exporting Economy

Abstract:     
Venezuela's government presents a debt structure biased toward instruments with short maturities mostly held by international bankers. However, the government has access to windfall revenues associated to oil exports that enhance its creditworthiness. A version of Cole and Kehoe (2000) model of debt crises augmented to incorporate income windfalls in the government sector is presented, and the possibility for a non-default equilibrium evaluated. Default is predicted for the Venezuelan economy without favorable terms of trade shocks. A crisis can be eliminated for a given size of the income windfall though. For those cases where the economy fail to exit the crisis zone, the combination of policies needed to abandon such a region is far more feasible to implement when a big oil rent is present.

Number of Pages in PDF File: 25

Keywords: Public Debt, Default, Multiple Equilibria, Oil Windfall

JEL Classification: E60, F34, H30

working papers series