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International spillovers and `ex-ante' efficient bailouts

Author

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  • 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
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