TY - JOUR
T1 - Slow moving debt crises
AU - Lorenzoni, Guido
AU - Werning, Iván
N1 - Publisher Copyright:
© 2019 American Economic Association. All rights reserved.
Copyright:
Copyright 2020 Elsevier B.V., All rights reserved.
PY - 2019/9
Y1 - 2019/9
N2 - We study slow moving debt crises: self-fulfilling equilibria in which high interest rates, due to the fear of a future default, lead to a gradual but faster accumulation of debt, ultimately validating investors' fear. We show that slow moving crises arise in a variety of settings, both when fiscal policy follows a given rule and when it is chosen by an optimizing government. A key assumption, in all these settings, is that the borrowing government cannot commit to issue a fixed amount of bonds in a given period. We discuss how multiplicity is avoided for low debt levels, for sufficiently responsive fiscal policy rules, and for long enough debt maturities. When the equilibrium is unique, debt dynamics are characterized by a tipping point, below which debt falls and stabilizes and above which debt and default rates grow.
AB - We study slow moving debt crises: self-fulfilling equilibria in which high interest rates, due to the fear of a future default, lead to a gradual but faster accumulation of debt, ultimately validating investors' fear. We show that slow moving crises arise in a variety of settings, both when fiscal policy follows a given rule and when it is chosen by an optimizing government. A key assumption, in all these settings, is that the borrowing government cannot commit to issue a fixed amount of bonds in a given period. We discuss how multiplicity is avoided for low debt levels, for sufficiently responsive fiscal policy rules, and for long enough debt maturities. When the equilibrium is unique, debt dynamics are characterized by a tipping point, below which debt falls and stabilizes and above which debt and default rates grow.
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U2 - 10.1257/aer.20141766
DO - 10.1257/aer.20141766
M3 - Article
AN - SCOPUS:85071857932
VL - 109
SP - 3229
EP - 3263
JO - American Economic Review
JF - American Economic Review
SN - 0002-8282
IS - 9
ER -