Working Paper: NBER ID: w19388
Authors: Mark Aguiar; Manuel Amador
Abstract: In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of sovereign debt. After highlighting conceptual issues that distinguish sovereign debt as well as reviewing a number of empirical facts, we use the model to discuss debt overhang, risk sharing, and capital flows in an environment of limited enforcement. We also discuss recent progress on default and renegotiation; self-fulfilling debt crises; and incomplete markets and their quantitative implications. We conclude with a brief assessment of the current state of the literature and highlight some directions for future research.
Keywords: Sovereign Debt; Limited Commitment; Risk Sharing; Debt Overhang; Renegotiation
JEL Codes: F34; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Limited enforcement mechanisms (P14) | Increased risk sharing issues (F65) |
| Debt overhang (H63) | Capital flows (F32) |
| Lack of enforcement (P14) | Prolonged renegotiation periods (D25) |
| Prolonged renegotiation periods (D25) | Economic costs (E30) |
| Defaults (Y70) | Economic downturns (E32) |
| Nature of sovereign debt contracts (H63) | Issues surrounding renegotiation and default (G33) |