Working Paper: CEPR ID: DP13202
Authors: Sergio Rebelo; Neng Wang; Jinqiang Yang
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.
Keywords: Sovereign Debt; Financial Development
JEL Codes: F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Low financial development (O16) | Increased credit spreads (G19) |
| Increased credit spreads (G19) | Reduced overall debt capacity (G32) |
| Reduced overall debt capacity (G32) | Limited ability to smooth consumption (D15) |
| Low financial development (O16) | Limited ability to smooth consumption (D15) |
| Low financial development (O16) | Reduced overall debt capacity (G32) |