Can Debt Crises Be Self-Fulfilling?

22 Pages Posted: 15 Feb 2006

See all articles by Marcos Chamon

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Date Written: June 2004


Several papers argue that debt crises can be the result of self-fulfilling expectations that no one will lend to a country. I show this type of coordination failure can be eliminated by a combination of state-contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well. This suggests that runs on the debt of a single borrower (such as the government) can be eliminated, and that self-fulfilling features are more plausible when articulated in a context in which externalities among many decentralized borrowers allow for economy-wide debt runs to occur.

Keywords: Debt crises, multiple equilibria, liquidity, financial innovation

JEL Classification: E60, F30, F34, G13

Suggested Citation

Chamon, Marcos, Can Debt Crises Be Self-Fulfilling? (June 2004). IMF Working Paper No. 04/99, Available at SSRN:

Marcos Chamon (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

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