Rare Disasters, Financial Development, and Sovereign Debt

49 Pages Posted: 17 Sep 2018

See all articles by Sergio T. Rebelo

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Jinqiang Yang

Columbia University; Shanghai University of Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2018

Abstract

We propose a model of sovereign debt where countries vary in their level of financial development, defined as the extent to which countries can hedge rare disasters in international capital markets. We show that low levels of financial development generate the “debt intolerance” phenomenon that plagues emerging markets: it reduces debt capacity, increases credit spreads, and limits the ability to smooth consumption.

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Suggested Citation

Tavares Rebelo, Sergio and Wang, Neng and Yang, Jinqiang, Rare Disasters, Financial Development, and Sovereign Debt (September 2018). NBER Working Paper No. w25031. Available at SSRN: https://ssrn.com/abstract=3250548

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Neng Wang

Columbia Business School - Finance and Economics ( email )

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United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Jinqiang Yang

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Shanghai University of Finance and Economics ( email )

Law School, 777 Guoding Road, Yangpu District
Shanghai, AK 200433
China

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