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  3. American Economic Review
  4. December 2019
  5. Sovereign Debt and Structural Reforms

Sovereign Debt and Structural Reforms

  • Andreas Müller
  • Kjetil Storesletten
  • Fabrizio Zilibotti
American Economic Review
vol. 109, no. 12, December 2019
(pp. 4220-59)
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Abstract

We construct a dynamic theory of sovereign debt and structural reforms with limited enforcement and moral hazard. A sovereign country in recession wishes to smooth consumption. It can also undertake costly reforms to speed up recovery. The sovereign can renege on contracts by suffering a stochastic cost. The constrained optimal allocation (COA) prescribes imperfect insurance with nonmonotonic dynamics for consumption and effort. The COA is decentralized by a competitive equilibrium with markets for renegotiable GDP-linked one-period debt. The equilibrium features debt overhang: reform effort decreases in a high debt range. We also consider environments with less complete markets.

Citation

Müller, Andreas, Kjetil Storesletten, and Fabrizio Zilibotti. 2019. "Sovereign Debt and Structural Reforms." American Economic Review, 109 (12): 4220-59. DOI: 10.1257/aer.20161457

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • F34 International Lending and Debt Problems
  • H63 National Debt; Debt Management; Sovereign Debt