Title:
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Sovereign debt and structural reforms
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Author:
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Müller, Andreas; Storesletten, Kjetil; Zilibotti, Fabrizio
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Abstract:
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We construct a dynamic theory of sovereign debt and structural reforms with three interacting frictions: limited enforcement, limited commitment, and incomplete markets. A sovereign country in recession issues debt to smooth consumption and makes reforms to speed up recovery. The sovereign can renege on debt by suffering a stochastic cost, in which case debt is renegotiated. The competitive Markov equilibrium features large fluctuations in consumption and reform effort. We contrast the equilibrium with an optimal contract with one-sided commitment. A calibrated model can match several salient facts about debt crises. We quantify the welfare effect of relaxing different frictions. |
Abstract:
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The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. |
Subject(s):
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-Austerity -Commitment -Debt overhang -Default -European debt crisis -Markov equilibrium -Moral hazard -Renegotiation -Risk premia -Risk sharing -Sovereign debt -Structural reforms |
Rights:
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open access
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https://creativecommons.org/licenses/by/4.0/ |
Document type:
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Working paper |
Published by:
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Share:
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Uri:
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https://ddd.uab.cat/record/196748
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