Renegotiation Policies in Sovereign Defaults

Cristina Arellano and Yan Bai

No 495, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing renegotiation processes that treat countries in isolation can prevent contagion of debt crises.

Keywords: Sovereign default; Contagion; Renegotiation policy (search for similar items in EconPapers)
JEL-codes: F30 G01 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-01-10
New Economics Papers: this item is included in nep-cba, nep-dge and nep-opm
Note: Forthcoming In: American Economic Review Papers and Proceedings
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Renegotiation Policies in Sovereign Defaults (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:495

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