Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal

60 Pages Posted: 10 Apr 2017

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Satyajit Cbatterjee

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Zachary Stangebye

University of Notre Dame

Multiple version iconThere are 3 versions of this paper

Date Written: April 2017

Abstract

We revisit self-fulfilling rollover crises by introducing an alternative equilibrium selection that involves bond auctions at depressed but strictly positive equilibrium prices, a scenario in line with observed sovereign debt crises. We refer to these auctions as “desperate deals,” the defining feature of which is a price schedule that makes the government indifferent to default or repayment. The government randomizes at the time of repayment, which we show can be implemented in pure strategies by introducing stochastic political payoffs or external bailouts. Quantitatively, auctions at fire-sale prices are crucial for generating realistic spread volatility.

Suggested Citation

Aguiar, Mark and Cbatterjee, Satyajit and Cole, Harold L. and Stangebye, Zachary, Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal (April 2017). NBER Working Paper No. w23312. Available at SSRN: https://ssrn.com/abstract=2949636

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Satyajit Cbatterjee

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Harold L. Cole

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
436 McNeil
Philadelphia, PA 19104
United States
215-898-7788 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zachary Stangebye

University of Notre Dame ( email )

Notre Dame, IN 46556
United States
5746311054 (Phone)

HOME PAGE: http://www.zachstangebye.com

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