Sargent-Wallace Meets Krugman-Flood-Garber, or: Why Sovereign Debt Swaps Do Not Avert Macroeconomic Crises

25 Pages Posted: 2 Apr 2005

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Kenneth M. Kletzer

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Brian Pinto

Independent

Abstract

This paper argues that the frequent failure of the debt swaps follows from fundamental forces driven by the market's assessment of the scarcity of fiscal revenue relative to the demand for fiscal outlays. As a country approaches the range of partial default, swaps may not provide the expected breathing room and could even bring the crisis forward. Our methodology combines three independent themes: exchange rate crises as the manifestation of excessive monetary injections, the fiscal theory of inflation and sovereign debt. The integrated framework derives devaluation and external debt repudiation as part of a public-finance optimising problem.

Suggested Citation

Aizenman, Joshua and Kletzer, Kenneth M. and Pinto, Brian, Sargent-Wallace Meets Krugman-Flood-Garber, or: Why Sovereign Debt Swaps Do Not Avert Macroeconomic Crises. Economic Journal, Vol. 115, No. 503, pp. 343-367, April 2005, Available at SSRN: https://ssrn.com/abstract=696967

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

Kenneth M. Kletzer

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
(408) 459-3407 (Phone)
(408) 459-5000 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Brian Pinto

Independent ( email )

No Address Available
United States

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