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

61 Pages Posted: 11 Apr 2017

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Satyajit Chatterjee

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: 2017-03-27

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.

Keywords: Debt, Crises, Bonds, Bond Auctions

Suggested Citation

Aguiar, Mark and Chatterjee, Satyajit and Cole, Harold L. and Stangebye, Zachary, Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal (2017-03-27). FRB of Philadelphia Working Paper No. 17-7. Available at SSRN: https://ssrn.com/abstract=2951035

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

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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