Sovereign Debt Crises and Floating-Rate Bonds

PDF – Journal link

Citation

Aguiar, Mark, Manuel Amador and Ricardo Alves Monteiro (2023): “Sovereign Debt Crises and Floating-Rate Bonds”

Abstract

Sovereign debt markets are plagued by a number of frictions; in particular, a limited commitment to repay, limited commitment to future fiscal policies (debt dilution), lack of state contingency, and vulnerability to self-fulfilling runs. We use an analytical model to explore the role of maturity in mitigating or exacerbating the respective frictions. We show that long-term debt with a variable (but capped) coupon combines many of the desirable properties of both short-term and long-term bonds. We then turn to a quantitative model to explore the welfare benefits or costs of issuing floating rate bonds.

BibTeX Cite:

@incollection {AAM2022,
	author       = {Mark Aguiar and Manuel Amador and Ricardo Alves Monteiro},
	title        = {Sovereign Debt Crises and Floating-Rate Bonds},
	booktitle    = {Credibility of Emerging Markets, Foreign Investors' Risk Perceptions, and Capital Flows},
	year         = {2023},
	pages        = {159--184},
	publisher    = {Central Bank of Chile},
	abstract = {Sovereign debt markets are plagued by a number of frictions; in particular, a limited commitment to repay, limited commitment to future fiscal policies (debt dilution), lack of state contingency, and vulnerability to self-fulfilling runs.  We use an analytical model to explore the role of maturity in mitigating or exacerbating the respective frictions.  We show that long-term debt with a variable (but capped) coupon combines many of the desirable properties of both short-term and long-term bonds.  We then turn to a quantitative model to explore the welfare benefits or costs of issuing floating rate bonds.},
	author = {Aguiar, Mark and Manuel Amador and Ricardo Alves Monteiro},
	
	url={https://markaguiar.github.io/files/floating_rate.pdf}
	}