Abstract
We propose a model of sovereign debt in which countries vary in their level of financial development, defined as the extent to which they can issue debt denominated in domestic currency in international capital markets. We show that low levels of financial development generate the “debt intolerance” phenomenon that plagues emerging markets: it reduces overall debt capacity, increases credit spreads, and limits the country's ability to smooth consumption.
Original language | English (US) |
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Pages (from-to) | 2719-2764 |
Number of pages | 46 |
Journal | Journal of Finance |
Volume | 77 |
Issue number | 5 |
DOIs | |
State | Published - Oct 2022 |
Funding
Sergio Rebelo is from Northwestern University and National Bureau of Economic Research. Neng Wang is from Columbia University, CKGSB, National Bureau of Economic Research, and Asian Bureau of Finance and Economic Research. Jinqiang Yang is from School of Finance, Shanghai University of Finance and Economics (SUFE), and Shanghai Institute of International Finance and Economics. We thank two anonymous referees; an Associate Editor; and Wei Xiong (Editor); as well as Patrick Bolton; Gideon Bornstein; Satyajit Chatterjee; Peter DeMarzo; Wenxin Du; Brett Green; Jim Hamilton; Zhiguo He; Benjamin Hébert; Harrison Hong; Dirk Krueger; Hanno Lustig; Matteo Maggiori; Gian Maria Milesi‐Ferretti; Tom Sargent; Jesse Schreger; and seminar participants at Columbia University, Finance Theory Group, George Mason University, HKU, IMF, Johns Hopkins University, Kansas City Fed, Northwestern University (Kellogg School), NTU RMI, NUS, Queens' University, Renmin University, Richmond Fed, Rutgers University, the 9th Summer Finance Conference (IDC Herzliya), the 18th China Economics Annual Conference, Tsinghua University, UCSD, and University of Maryland (Economics and Finance) for helpful comments. We have read disclosure policy and have no conflicts of interest to disclose. Neng Wang acknowledges the support from the Chazen Institute for Global Business at Columbia Business School. Jinqiang Yang acknowledges the support from the National Natural Science Foundation of China (#71772112, #71972122, #72072108), and Innovative Research Team of Shanghai University of Finance and Economics (#2016110241). The Journal of Finance
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics