Slow moving debt crises

Guido Lorenzoni, Iván Werning

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)3229-3263
Number of pages35
JournalAmerican Economic Review
Volume109
Issue number9
DOIs
StatePublished - Sep 2019

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Slow moving debt crises'. Together they form a unique fingerprint.

Cite this