Rare Disasters, Financial Development, and Sovereign Debt

47 Pages Posted: 2 Oct 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 University; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

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 study the implications of the interaction between rare disasters and financial development for sovereign debt markets. In our model, countries vary in their financial development, by which we mean the extent to which shocks can be hedged in international capital markets. The model predicts that low levels of financial development generate a key feature of sovereign debt in emerging economies known as "debt intolerance": high credit spreads associated with lower debt-to-output ratios than those of developed countries.

Keywords: Financial Development, Sovereign debt

JEL Classification: F34

Suggested Citation

Tavares Rebelo, Sergio and Wang, Neng and Yang, Jinqiang, Rare Disasters, Financial Development, and Sovereign Debt (September 2018). CEPR Discussion Paper No. DP13202. Available at SSRN: https://ssrn.com/abstract=3259364

Sergio Tavares Rebelo (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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Neng Wang

Columbia University ( email )

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National Bureau of Economic Research (NBER) ( email )

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Jinqiang Yang

Columbia University ( email )

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Shanghai University of Finance and Economics ( email )

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Shanghai, AK 200433
China

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