Slow Moving Debt Crises
Name
aer.20141766.pdf
Description
Published version
Size
982.07 KB
Format
Adobe PDF
Checksum (MD5)
0e80652eb2c83c8955269ac6d98da487
Author(s)
Lorenzoni, Guido
Werning, Ivan
Date Issued
September 2019
Journal
American Economic Review
Publisher
American Economic Association
Citation
Lorenzoni, Guido and Iván Werning. "Slow Moving Debt Crises." American Economic Review 109, 9 (September 2019): 3229-3263
Version
Final published version
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.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Sloan School of Management
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1257/aer.20141766
