# Self-Fulﬁlling Debt Crises, Revisited

53 Pages Posted: 21 Jan 2020 Last revised: 31 Dec 2020

See all articles by Mark Aguiar

## Mark Aguiar

Princeton University

## Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

## Zachary Stangebye

University of Notre Dame

Date Written: January 17, 2020

### Abstract

We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues \emph{more} debt because of the crisis, albeit at depressed prices. Another possible outcome is a sudden stop'' (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government's incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the one-period debt model, including such crises increase the default probabilities by a factor of five and the spread volatility by a factor of twenty-five.

Keywords: self-fulﬁlling debt crises, rollover crises

JEL Classification: F1, G3

Suggested Citation

Aguiar, Mark and Chatterjee, Satyajit and Cole, Harold L. and Stangebye, Zachary, Self-Fulﬁlling Debt Crises, Revisited (January 17, 2020). Available at SSRN: https://ssrn.com/abstract=3521505 or http://dx.doi.org/10.2139/ssrn.3521505