Self-Fulfilling Debt Crises, Revisited

46 Pages Posted: 29 Apr 2020 Last revised: 30 Jun 2022

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Harold L. Cole

University of Pennsylvania

Zachary Stangebye

University of Notre Dame

Date Written: January 1, 2020


We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap in time (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 that the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues 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 model, including such crises in-creases 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 1, 2020). FRB of Philadelphia Working Paper No. 20-3, Available at SSRN: or

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)


Harold L. Cole

University of Pennsylvania

Philadelphia, PA 19104
United States

Zachary Stangebye

University of Notre Dame ( email )

Notre Dame, IN 46556
United States
5746311054 (Phone)


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