Sovereign debt and structural reforms

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To access the full text documents, please follow this link: http://hdl.handle.net/10230/28283

dc.contributor.author	Müller, Andreas
dc.contributor.author	Storesletten, Kjetil
dc.contributor.author	Zilibotti, Fabrizio
dc.date	2016-09
dc.identifier.uri	http://hdl.handle.net/10230/28283
dc.format	application/pdf
dc.language.iso	eng
dc.relation	ADEMU Working Paper Series;56
dc.relation	info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights	This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights	info:eu-repo/semantics/openAccess
dc.rights	http://creativecommons.org/licenses/by/4.0/
dc.subject	Austerity
dc.subject	Commitment
dc.subject	Debt overhang
dc.subject	Default
dc.subject	European debt crisis
dc.subject	Markov equilibrium
dc.subject	Moral hazard
dc.subject	Renegotiation
dc.subject	Risk premia
dc.subject	Risk sharing
dc.subject	Sovereign debt
dc.subject	Structural reforms
dc.title	Sovereign debt and structural reforms
dc.type	info:eu-repo/semantics/workingPaper
dc.description.abstract	We construct a dynamic theory of sovereign debt and structural reforms with three interacting frictions: limited enforcement, limited commitment, and incomplete markets. A sovereign country in recession issues debt to smooth consumption and makes reforms to speed up recovery. The sovereign can renege on debt by suffering a stochastic cost, in which case debt is renegotiated. The competitive Markov equilibrium features large fluctuations in consumption and reform effort. We contrast the equilibrium with an optimal contract with one-sided commitment. A calibrated model can match several salient facts about debt crises. We quantify the welfare effect of relaxing different frictions.
dc.description.abstract	The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

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