Sovereign Debt Ratchets and Welfare Destruction

DeMarzo, Peter M.; He, Zhiguo; Tourre, Fabrice

doi:10.2139/ssrn.3809571

Cited by 2 publications

(3 citation statements)

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“…and Tourre (2021) show that it is optimal to have smooth debt issuance in their model. Bornstein (2020) generates default by assuming that output follows a Poisson process in a continuous-time version of Arellano (2008).…”

Section: Simplifying the Model Solutionmentioning

confidence: 99%

“…For this reason, other diffusion-based debt models work with term debt in order to generate default (see, e.g., Leland (1994), Nuño and Thomas (2015), and Tourre (2017)). DeMarzo, He, and Tourre (2020) show that it is optimal to have smooth debt issuance in their model. Bornstein (2020) generates default by assuming that output follows a Poisson process in a continuous-time version of Arellano (2008).…”

Section: Simplifying the Model Solutionmentioning

confidence: 99%

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Rare Disasters, Financial Development, and Sovereign Debt

Rebelo¹,

Wang²,

Yang³

2022

The Journal of Finance

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We propose a model of sovereign debt in which countries vary in their level of financial development, defined as the extent to which they can issue debt denominated in domestic currency in international capital markets. We show that low levels of financial development generate the "debt intolerance" phenomenon that plagues emerging markets: it reduces overall debt capacity, increases credit spreads, and limits the country's ability to smooth consumption.AN INTRIGUING FACT ABOUT SOVEREIGN debt markets is that emerging economies pay high credit spreads on their sovereign debt, despite generally having much lower debt-output ratios than developed countries. Reinhart, Rogoff, and Savastano (2003) call this phenomenon "debt intolerance."In this paper, we propose a model of sovereign debt in which countries vary in their level of financial development. By "financial development," we refer to the extent to which a country can issue debt denominated in domestic

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Section: Simplifying the Model Solutionmentioning

confidence: 99%

Section: Simplifying the Model Solutionmentioning

confidence: 99%

Rare Disasters, Financial Development, and Sovereign Debt

Rebelo¹,

Wang²,

Yang³

2022

The Journal of Finance

View full text Add to dashboard Cite

show abstract

“…3 See, e.g., Leland and Toft (1996), Leland (1998), Brunnermeier and Yogo (2009), Cheng and Milbradt (2012), He and Xiong (2012a,b), Chen, Xu, and Yang (2012), Brunnermeier and Oehmke (2013), Décamps and Villeneuve (2014), Diamond and He (2014), Milbradt (2014, 2016), Hugonnier, Malamud, and Morellec (2015), Abel (2016), Huang, Oehmke, and Zhong (2019), Della Seta, Morellec, and Zucchi (2020), and DeMarzo, He, and Tourre (2021).…”

Section: Introductionmentioning

confidence: 99%