Working Paper: NBER ID: w25011
Authors: Marina Azzimonti; Vincenzo Quadrini
Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in countries that hold its debt, which could justify why a given country may want to bailout another. But why do creditor countries choose to bail out debtor countries instead of their own private sector? We show that this is because an external bailout could be cheaper than a domestic bailout. We also show that, although anticipated bailouts lead to higher borrowing, they can be Pareto improving not only ex-post (after a country has defaulted) but also ex-ante (before the country chooses its debt).
Keywords: sovereign debt; bailouts; international spillovers; macroeconomic spillovers; moral hazard
JEL Codes: E44; E6; E61; E62; F3; F42; F44; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated bailouts (H81) | increase borrowing levels (H74) |
| anticipated bailouts (H81) | moral hazard problem (D82) |
| external bailouts (H81) | cheaper than domestic bailouts (H81) |
| external bailouts (H81) | mitigate negative macroeconomic spillovers (F41) |
| anticipated bailouts (H81) | Pareto improving ex ante (D61) |
| external bailouts (H81) | reduce macroeconomic losses (E44) |