Debt crises, fast and slow Giancarlo

No 2023/15, RSCAS Working Papers from European University Institute

Abstract: We build a dynamic model where the economy is vulnerable to belief-driven slowmoving debt crisesat intermediate debt level, and rollover crises at both low and high debt levels. Vis-à-vis the threatof slow-moving crises, countercyclical deficits generally welfare-dominate debt reduction policies.In a recession, optimizing governments only deleverage if debt is close to the threshold below whichbelief-driven slow-moving crises can no longer occur. The welfare benefits from deleveraging insteaddominate if governments are concerned with losing market access even at low debt levels. Longbond maturities may fully eliminate belief-driven rollover crises but not slow-moving ones.

Keywords: Sovereign default; Self-fulfilling crises; Expectations; Debt sustainability (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-dge, nep-inv and nep-opm
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