This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

Sovereign Debt and Structural Reforms

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

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