Working Paper: CEPR ID: DP3541
Authors: Assaf Razin; Efraim Sadka
Abstract: We develop a stylised model of multiple equilibria, with country risk spreads at the focus of the analysis. Fears that the country default on its debt triggers a reversal in the direction of inflows of international financial capital raise interest-rate spreads and thus the cost of servicing the public debt. The analytical framework is standard: creditors observe the output of borrowing only at a cost.
Keywords: costly-state verification; debt crisis; multiple self-fulfilling expectations equilibria
JEL Codes: F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political context (election anticipation) (D72) | debt crisis (F34) |
| macroeconomic fundamentals (primary surplus, low debt-to-GDP) (E62) | debt crisis (F34) |
| political context (election anticipation) + macroeconomic fundamentals (primary surplus, low debt-to-GDP) (E66) | multiple equilibria in debt crisis (D59) |