Non-defaultable debt and sovereign risk /
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Author / Creator: | Hatchondo, Juan Carlos, author. |
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Imprint: | Washington, D.C. : International Monetary Fund, IMF Institute for Capacity Development, 2014. |
Description: | 1 online resource (25 pages) |
Language: | English |
Series: | IMF working paper ; WP14/198 IMF working paper ; WP14/198. |
Subject: | |
Format: | E-Resource Book |
URL for this record: | http://pi.lib.uchicago.edu/1001/cat/bib/12504138 |
Summary: | We quantify gains from introducing non-defaultable debt as a limited additional financing option into a model of equilibrium sovereign risk. We find that, for an initial (defaultable) sovereign debt level equal to 66 percent of trend aggregate income and a sovereign spread of 2.9 percent, introducing the possibility of issuing non-defaultable debt for up to 10 percent of aggregate income reduces immediately the spread to 1.4 percent, and implies a welfare gain equivalent to a permanent consumption increase of 0.9 percent. The spread reduction would be only 0.1 (0.2) percentage points higher if the government uses nondefaultable debt to buy back (finance a "voluntary" debt exchange for) previously issued defaultable debt. Without restrictions to defaultable debt issuances in the future, the spread reduction achieved by the introduction of non-defaultable debt is short lived. We also show that allowing governments in default to increase non-defaultable debt is damaging at the time non-defaultable debt is introduced and inconsequential in the medium term. These findings shed light on different aspects of proposals to introduce common euro-area sovereign bonds that could be virtually non-defaultable. |
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Item Description: | "October 2014." |
Physical Description: | 1 online resource (25 pages) |
ISBN: | 9781484340660 1484340663 |