The Dynamics of Sovereign Debt Crises and Bailouts

42 Pages Posted: 10 May 2018

See all articles by Harald Uhlig

Harald Uhlig

University of Chicago - Department of Economics

Francisco Roch

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: May 10, 2018

Abstract

Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the strategy with the minimal actuarially fair intervention which guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.

Keywords: Default, Bailouts, Self-fulfilling Crises, Endogenous Borrowing Constraints, Long-term Debt, OMT, Eurozone Debt Crisis

JEL Classification: F34, F41

Suggested Citation

Uhlig, Harald and Roch, Francisco, The Dynamics of Sovereign Debt Crises and Bailouts (May 10, 2018). Becker Friedman Institute for Research in Economics Working Paper No. 2018-29, Available at SSRN: https://ssrn.com/abstract=3176670 or http://dx.doi.org/10.2139/ssrn.3176670

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Francisco Roch

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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