Self-Fulfilling Debt Crises, Revisited

Lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt and immediate default. We show that the same lack of commitment leads to other possible self-fulfilling crises, including issuance of more debt at depressed prices, or a “sudden stop” (force...

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Published in:The Journal of political economy 2022-05, Vol.130 (5), p.1147-1183
Main Authors: Aguiar, Mark, Chatterjee, Satyajit, Cole, Harold, Stangebye, Zachary
Format: Article
Language:English
Subjects:
Auctions
Debt
Economic theory
Payments
Political economy
Prices
Uncertainty
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description Lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt and immediate default. We show that the same lack of commitment leads to other possible self-fulfilling crises, including issuance of more debt at depressed prices, or a “sudden stop” (forced austerity) in which debt issuance is sharply curtailed. Both outcomes stem from the government's incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. These outcomes generate a large increase in spread volatility in both a 1-period and a multiperiod quantitative debt model.
doi_str_mv 10.1086/718934
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source EconLit s plnými texty; International Bibliography of the Social Sciences (IBSS); Business Source Ultimate; University of Chicago Press Journals
subjects Auctions
Debt
Economic theory
Payments
Political economy
Prices
Uncertainty
title Self-Fulfilling Debt Crises, Revisited
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