IDEAS home Printed from https://ideas.repec.org/p/red/sed019/318.html
   My bibliography  Save this paper

International spillovers and `ex-ante' efficient bailouts

Author

Listed:
  • Marina Azzimonti

    (Stony Brook University)

  • Vincenzo Quadrini

    (USC)

Abstract

We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction also in other countries. This creates a vested-interest to bailout the defaulting country. A novel insight of the paper is that bailouts could be efficient not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt). Although anticipated bailouts create the typical moral hazard problem leading to higher borrowing, it may correct for the inefficient issuance of debt that results from the lack of cross-country policy coordination.

Suggested Citation

  • Marina Azzimonti & Vincenzo Quadrini, 2019. "International spillovers and `ex-ante' efficient bailouts," 2019 Meeting Papers 318, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:318
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_318.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fink, Fabian & Scholl, Almuth, 2016. "A quantitative model of sovereign debt, bailouts and conditionality," Journal of International Economics, Elsevier, vol. 98(C), pages 176-190.
    2. Gabriel Cuadra & Juan Sanchez & Horacio Sapriza, 2010. "Fiscal Policy and Default Risk in Emerging Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 452-469, April.
    3. Roch, Francisco & Uhlig, Harald, 2018. "The dynamics of sovereign debt crises and bailouts," Journal of International Economics, Elsevier, vol. 114(C), pages 1-13.
    4. Aguiar, Mark & Amador, Manuel, 2016. "Fiscal policy in debt constrained economies," Journal of Economic Theory, Elsevier, vol. 161(C), pages 37-75.
    5. Aiyagari, S. Rao & McGrattan, Ellen R., 1998. "The optimum quantity of debt," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 447-469, October.
    6. Emmanuel Farhi & Jean Tirole, 2018. "Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(3), pages 1781-1823.
    7. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    8. Dirk Niepelt, 2016. "Domestic and External Debt and Default," 2016 Meeting Papers 635, Society for Economic Dynamics.
    9. Javier Bianchi, 2016. "Efficient Bailouts?," American Economic Review, American Economic Association, vol. 106(12), pages 3607-3659, December.
    10. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
    11. Pablo D'Erasmo & Enrique Mendoza, 2011. "Optimal Domestic (and External) Sovereign Default," PIER Working Paper Archive 16-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 04 Aug 2016.
    12. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    13. Rishabh Kirpalani & Alessandro Dovis, 2017. "Fiscal Rules, Bailouts, and Reputation in Federal Governments," 2017 Meeting Papers 1177, Society for Economic Dynamics.
    14. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
    15. Fernando Broner & Alberto Martin & Jaume Ventura, 2010. "Sovereign Risk and Secondary Markets," American Economic Review, American Economic Association, vol. 100(4), pages 1523-1555, September.
    16. Bai, Yan & Zhang, Jing, 2012. "Duration of sovereign debt renegotiation," Journal of International Economics, Elsevier, vol. 86(2), pages 252-268.
    17. Guillermo Calvo & Mervyn King (ed.), 1998. "The Debt Burden and its Consequences for Monetary Policy," International Economic Association Series, Palgrave Macmillan, number 978-1-349-26077-5, December.
    18. Michael Tomz & Mark L.J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 247-272, May.
    19. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
    20. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2013. "Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises," Working Papers 2013-4, Princeton University. Economics Department..
    21. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    22. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    23. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1697-1755, Elsevier.
    24. Di Casola, Paola & Sichlimiris, Spyridon, 2017. "Domestic and External Sovereign Debt," Working Paper Series 345, Sveriges Riksbank (Central Bank of Sweden).
    25. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is it is or is it ain't your obligation? Regional debt in a fiscal federation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00310512, HAL.
    26. Sosa-Padilla, César, 2018. "Sovereign defaults and banking crises," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 88-105.
    27. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    28. Fernando Broner & Jaume Ventura, 2011. "Globalization and Risk Sharing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(1), pages 49-82.
    29. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "Heterogeneous Borrowers In Quantitative Models Of Sovereign Default," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1129-1151, November.
    30. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    31. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 403-414.
    32. Alexander Guembel & Oren Sussman, 2009. "Sovereign Debt without Default Penalties," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(4), pages 1297-1320.
    33. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers 1122, Society for Economic Dynamics.
    34. Ignacio Presno & Demian Pouzo, 2014. "Optimal Taxation with Endogenous Default under Incomplete Markets," 2014 Meeting Papers 689, Society for Economic Dynamics.
    35. Alessandro Dovis & Mikhail Golosov & Ali Shourideh, 2016. "Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity," NBER Working Papers 21948, National Bureau of Economic Research, Inc.
    36. Diego J. Perez, 2015. "Sovereign Debt, Domestic Banks and the Provision of Public Liquidity," Discussion Papers 15-016, Stanford Institute for Economic Policy Research.
    37. Park, JungJae, 2013. "Contagion of Sovereign Default Risk: the Role of Two Financial Frictions," MPRA Paper 55197, University Library of Munich, Germany.
    38. Demian Pouzo & Ignacio Presno, 2016. "Sovereign Default Risk and Uncertainty Premia," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(3), pages 230-266, July.
    39. Alessandro Dovis & Rishabh Kirpalani, 2017. "Fiscal Rules, Bailouts, and Reputation in Federal Governments," NBER Working Papers 23942, National Bureau of Economic Research, Inc.
    40. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    41. Allan Drazen, 1998. "Towards a Political-Economic Theory of Domestic Debt," International Economic Association Series, in: Guillermo Calvo & Mervyn King (ed.), The Debt Burden and its Consequences for Monetary Policy, chapter 6, pages 159-178, Palgrave Macmillan.
    42. Yan Bai & Cristina Arellano, 2012. "Linkages across sovereign debt markets," 2012 Meeting Papers 414, Society for Economic Dynamics.
    43. Azzimonti, Marina & Yared, Pierre, 2019. "The optimal public and private provision of safe assets," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 126-144.
    44. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
    45. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dong, Feng & Xu, Zhiwei, 2022. "Bubbly bailout," Journal of Economic Theory, Elsevier, vol. 202(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marina Azzimonti & Vincenzo Quadrini, 2024. "International Spillovers and Bailouts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 77-128.
    2. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Distributional Incentives In An Equilibrium Model Of Domestic Sovereign Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 7-44, February.
    3. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    4. D’Erasmo, Pablo & Mendoza, Enrique G., 2021. "History remembered: Optimal sovereign default on domestic and external debt," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 969-989.
    5. Pablo D'Erasmo & Enrique Mendoza, 2011. "Optimal Domestic (and External) Sovereign Default," PIER Working Paper Archive 16-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 04 Aug 2016.
    6. Engler, Philipp & Große Steffen, Christoph, 2016. "Sovereign risk, interbank freezes, and aggregate fluctuations," European Economic Review, Elsevier, vol. 87(C), pages 34-61.
    7. Diego J. Perez, 2015. "Sovereign Debt, Domestic Banks and the Provision of Public Liquidity," Discussion Papers 15-016, Stanford Institute for Economic Policy Research.
    8. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1697-1755, Elsevier.
    9. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    10. Kaas, Leo & Mellert, Jan & Scholl, Almuth, 2020. "Sovereign and private default risks over the business cycle," Journal of International Economics, Elsevier, vol. 123(C).
    11. Bernardo Guimaraes & Lucas Tumkus, 2020. "On the costs of sovereign default in quantitative models," Discussion Papers 2021, Centre for Macroeconomics (CFM).
    12. Aguiar, Mark & Amador, Manuel, 2014. "Sovereign Debt," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 647-687, Elsevier.
    13. Nikolai Stähler, 2013. "Recent Developments In Quantitative Models Of Sovereign Default," Journal of Economic Surveys, Wiley Blackwell, vol. 27(4), pages 605-633, September.
    14. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.
    15. Roettger, Joost, 2019. "Discretionary monetary and fiscal policy with endogenous sovereign risk," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 44-66.
    16. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    17. Josefin Meyer & Carmen M Reinhart & Christoph Trebesch, 2022. "Sovereign Bonds Since Waterloo," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(3), pages 1615-1680.
    18. Leonardo Martinez & Francisco Roch & Francisco Roldán & Jeromin Zettelmeyer, 2023. "Sovereign debt," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 17, pages 378-405, Edward Elgar Publishing.
      • Leonardo Martinez & Francisco Roch & Francisco Roldan & Jeromin Zettelmeyer, 2022. "Sovereign Debt," Working Papers 167, Red Nacional de Investigadores en Economía (RedNIE).
      • Mr. Leonardo Martinez & Mr. Francisco Roch & Francisco Roldán & Mr. Jeromin Zettelmeyer, 2022. "Sovereign Debt," IMF Working Papers 2022/122, International Monetary Fund.
    19. Mihalache, Gabriel, 2020. "Sovereign default resolution through maturity extension," Journal of International Economics, Elsevier, vol. 125(C).
    20. Sewon Hur & César Sosa-Padilla & Zeynep Yom, 2021. "Optimal bailouts in banking and sovereign crises," Working Papers 51, Red Nacional de Investigadores en Economía (RedNIE).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed019:318. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.