The Dynamics of Sovereign Debt Crises and Bailouts

44 Pages Posted: 15 May 2018

See all articles by Francisco Roch

Francisco Roch

International Monetary Fund (IMF)

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 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: Bailouts, default, Endogenous Borrowing Constraints, Eurozone Debt Crisis, long-term debt, OMT, Self-fulfilling Crises

JEL Classification: F34, F41

Suggested Citation

Roch, Francisco and Uhlig, Harald, The Dynamics of Sovereign Debt Crises and Bailouts (May 2018). CEPR Discussion Paper No. DP12921, Available at SSRN: https://ssrn.com/abstract=3178091

Francisco Roch (Contact Author)

International Monetary Fund (IMF) ( email )

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

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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