Journal of Political Economy Vol. 130 No. 5 2022
Self-Fulfilling Debt Crises, Revisited
Abstract
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
- 10.1086/718934
- Volume
- 130
- Issue
- 5
- Pages
- 1147-1183
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref