International Spillovers and ‘Ex-Ante’ Efficient Bailouts

52 Pages Posted: 17 Sep 2018

See all articles by Marina Azzimonti

Marina Azzimonti

SUNY Stony Brook - Department of Economics; National Bureau of Economic Research (NBER)

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 2018

Abstract

We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction also in other countries. This generates a self-interest for these other countries to bailout the defaulting country. A novel insight of the paper is that bailouts could be efficient not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt). Although anticipated bailouts create the typical moral hazard problem leading countries to issue more debt, this may correct for the under issuance of public debt that would result from the lack of cross-country policy coordination.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Suggested Citation

Azzimonti, Marina and Quadrini, Vincenzo, International Spillovers and ‘Ex-Ante’ Efficient Bailouts (September 2018). NBER Working Paper No. w25011, Available at SSRN: https://ssrn.com/abstract=3246834

Marina Azzimonti (Contact Author)

SUNY Stony Brook - Department of Economics ( email )

NY 11733-4384
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
157
PlumX Metrics