An integrated approach to the economics of sovereign default. Fiscal crises and sovereign default repeatedly threaten the stability and growth of economies around the world. Mark Aguiar and Manuel Amador provide a unified and tractable theoretical framework that elucidates the key economics behind sovereign debt markets, shedding light on the frictions and inefficiencies that prevent the smooth functioning of these markets, and proposing sensible approaches to sovereign debt management. The Economics of Sovereign Debt and Default looks at the core friction unique to sovereign debt--the lack of strong legal enforcement--and goes on to examine additional frictions such as deadweight costs of default, vulnerability to runs, the incentive to "dilute" existing creditors, and sovereign debt's distortion of investment and growth. The book uses the tractable framework to isolate how each additional friction affects the equilibrium outcome, and illustrates its counterpart using state-of-the-art computational modeling. The novel approach presented here contrasts the outcome of a constrained efficient allocation--one chosen to maximize the joint surplus of creditors and government--with the competitive equilibrium outcome. This allows for a clear analysis of the extent to which equilibrium prices efficiently guide the government's debt and default decisions, and of what drives divergences with the efficient outcome. Providing an integrated approach to sovereign debt and default, this incisive and authoritative book is an ideal resource for researchers and graduate students interested in this important topic.

• Cover
• Contents
• List of Figures
• List of Tables
• Acknowledgments
• 1. Introduction
  • 1.1 Overview
  • 1.2 Empirical Landscape
  • 1.3 Goals
• 2. Limited Commitment
  • 2.1 Introduction
  • 2.2 Environment
  • 2.3 First-Best Risk Sharing
  • 2.4 Limited Commitment
  • 2.5 Constrained Efficient Allocations
    • 2.5.1 The Case of ßR=1
    • 2.5.2 An Impatient Sovereign
  • 2.6 The Bulow-Rogoff Critique
  • 2.7 Conclusion
• 3. Growth under Limited Commitment
  • 3.1 Introduction
  • 3.2 Environment
  • 3.3 Full Commitment Allocation
  • 3.4 Limited Commitment
  • 3.5 Growth with Political Economy Frictions
  • 3.6 Conclusion
• 4. IncompleteMarkets
  • 4.1 Introduction
  • 4.2 Environment
  • 4.3 CompleteMarkets Benchmark
  • 4.4 IncompleteMarkets: A Planning Problem
  • 4.5 IncompleteMarkets: Decentralization
  • 4.6 Conclusion
• 5. The Standard One-Period Bond Model
  • 5.1 Introduction
  • 5.2 Environment
    • 5.2.1 Timing
    • 5.2.2 Equilibrium Objects
  • 5.3 Characterizing Equilibria
  • 5.4 Two Operators
    • 5.4.1 The Price Operator
    • 5.4.2 A Pseudo-Planning Problem
  • 5.5 Quantitative Results
  • 5.6 Conclusion
• 6. Self-Fulfilling Debt Crises
  • 6.1 Introduction
  • 6.2 Environment
    • 6.2.1 Eaton-Gersovitz Timing
    • 6.2.2 Cole-Kehoe Timing
  • 6.3 Self-Fulfilling Rollover Crises
  • 6.4 Debt Issuance
  • 6.5 The Security of Long-Term Bonds
  • 6.6 Extensions: Sudden Stops and Over-Borrowing
    • 6.6.1 Sudden Stops
    • 6.6.2 Over-Borrowing and Prolonged Crises
  • 6.7 Domestic Currency Bonds and Rollover Risk
  • 6.8 Policy Responses and Debt Design
  • 6.9 Conclusion
• 7. Long-Term Bonds
  • 7.1 Introduction
  • 7.2 Environment
    • 7.2.1 The Government’s Problem
    • 7.2.2 Lenders’ Break-Even Condition
    • 7.2.3 Equilibrium with Long-Term Bonds
  • 7.3 Characterizing Competitive Equilibria
    • 7.3.1 The Safe Zone
    • 7.3.2 The Crisis Zone
  • 7.4 Inefficiency and Long-Term Bonds
  • 7.5 Maturity Choice, Debt Buybacks, and Restructuring
    • 7.5.1 AModified Planning Problem
    • 7.5.2 Maturity Choice
    • 7.5.3 Buybacks vs. Restructuring: The Role of Holdouts
    • 7.5.4 The Yield Curve and the Elasticity of the Bond Price
  • 7.6 Example Equilibria
    • 7.6.1 A Closed-Form Solution: The Case of Perpetuities
    • 7.6.2 An Example with IntermediateMaturity
  • 7.7 The Pareto Frontier and the Debt Laffer Curve
  • 7.8 Self-Fulfilling Debt Dilution
    • 7.8.1 Environment
    • 7.8.2 Efficient Allocations with Relative Impatience
    • 7.8.3 Competitive Equilibria Revisited
  • 7.9 Quantitative Models
  • 7.10 Conclusion
• 8. Conclusion
• Bibliography
• Index