Self-Fulfilling Debt Crises, Revisited

PDF – Journal link – Online appendix – Code for Numerical Simulations

Citation

Aguiar, Mark, Satyajit Chatterjee, Harold Cole, and Zachary Stangebye (2022): “Self-Fulfilling Debt Crises, Revisited,” Journal of Political Economy, 130 (5):1147-1183, May 2022

Abstract

We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a “sudden stop” (or forced austerity) in which the government sharply curtails debt issuance. 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. In an otherwise standard quantitative version of the model, including such crises increase the default probabilities by a factor of five and the spread volatility by a factor of twenty-five.

BibTeX Cite:

@article {ACCS2019,
	author = {Aguiar, Mark and Chatterjee, Satyajit and Cole, Harold and Stangebye, Zachary},
	title = {Self-Fulfilling Debt Crises, Revisited},
	journal = {Journal of Political Economy},
	volume = {130},
	number = {5},
	pages = {1147-1183},
	month = May,
	year = {2022},
	doi = {10.1086/718934},
	
	URL = {
	https://doi.org/10.1086/718934
	
	},
	eprint = {
	https://doi.org/10.1086/718934
	
	}
	,
	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. }
	}