Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely

Cottarelli, Carlo; Mauro, Paolo; Forni, Lorenzo; Gottschalk, Jan

doi:10.5089/9781455261307.004

Cited by 37 publications

(15 citation statements)

References 6 publications

(7 reference statements)

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“…As debt increases, the primary balance also increases but the responsiveness eventually weakens and then actually decreases at very 3 There is a large body of literature on sovereign default, although most of these papers consider strategic default by developing seven country governments (see the survey by Eaton and Fernandez (1995) and the recent quantitative studies along the lines of Arellano (2008) and Aguiar and Gopinath (2006)). Here, we model default, not as an explicit strategic decision by the government, but rather as a result of the government's inability to rollover debt in the face of rising interest payments, given its primary balance reaction function (Cottarelli et al, 2010).…”

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confidence: 99%

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Ghosh

Kim

Mendoza

et al. 2013

The Economic Journal

478

315

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How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic model of sovereign default in which risk-neutral investors lend to a government that displays 'fiscal fatigue', whereby its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled over. Using data for 23 advanced economies over the period 1970-2007, we find evidence of a fiscal reaction function with these features, and use it to compute 'fiscal space', defined as the difference between current debt ratios and the estimated debt limits.

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confidence: 99%

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Ghosh

Kim

Mendoza

et al. 2013

The Economic Journal

478

315

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“…Here, we model default as a problem of inability-to-pay, triggered by an inability to rollover debt in the face of rising interest payments and stochastic shocks to the primary balance. We believe that inability-to-pay rather than strategic default is more likely to be relevant for analyzing public debt in advanced economies (see alsoCottarelli et al, 2010).…”

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confidence: 99%

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Ghosh¹,

Kim²,

Mendoza³

et al. 2011

171

191

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We thank Olivier Blanchard, Henning Bohn, David Romer, and participants at the IMF's Eleventh Annual Jacques Polak Research Conference for helpful comments and suggestions. Any errors are the authors' responsibility. The views expressed herein are those of the authors, and should not be attributed to the IMF, its Executive Board, its management, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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“…1 This ignores temporary suspensions of payments in the interwar years by some gold standard economies (Bordo and Kydland, 1990;Eichengreen, 1991). A particularly unfortunate statement on the insulation of advanced economies from debt default is from another IMF study (Cottarelli et al, 2010), a statement made just months before the Greek default. Several analysts had seen the writing on the wall (Calomiris, 2010;Zingales, 2010;Buiter and Rahbari, 2010).…”

Section: (I) Debt Ratiosmentioning

confidence: 99%

Sovereign debt and its restructuring framework in the eurozone

Mody¹

2013

Oxford Review of Economic Policy

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To compensate for the inflexibility due to fixed exchange rates, the eurozone needs flexibility through a system of orderly debt restructuring. With virtually no room for macroeconomic manoeuvring since the crisis onset, fiscal austerity has been the main instrument for achieving reduction of public debt levels; but because austerity also weakens growth, public debt ratios have barely budged. Austerity has also implied continued high private debt ratios, and these debt burdens have perpetuated economic stasis. Economic theory, history, and the recent experience all call for a principled debt restructuring mechanism as an integral element of the Eurozone design. Sovereign debt should be recognized as equity (a residual claim on the sovereign), operationalized by the automatic lowering the debt burden upon the breach of contractually specified thresholds. Making debt more equity-like is also the way forward for speedy private deleveraging. This debt-equity swap principle is a needed shock absorber for the future but will also serve as the principle to deal with the overhang of 'legacy' debt.

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Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely

Cited by 37 publications

References 6 publications

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies

Sovereign debt and its restructuring framework in the eurozone

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