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  5. Hidden Debt

Hidden Debt

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Abstract

We study the role of transparency in debt and default dynamics in a quantitative sovereign default model augmented with asymmetric information. We assume that the sovereign debt portfolio is not transparent and part of the debt is not observable to lenders. The quantitative model is calibrated to the Bolivian economy and matches its long-term and business cycle properties. The quantitative results show that when the government moves to a transparent reporting regime, bond prices improve and the sovereign debt portfolio shifts toward noncontingent debt with an increase in overall debt level. However, higher debt increases default frequency and reduces welfare.

Citation

Guler, Bulent, Yasin Kürşat Önder, and Temel Taskin. 2022. "Hidden Debt." AEA Papers and Proceedings, 112: 536-40. DOI: 10.1257/pandp.20221003

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • F34 International Lending and Debt Problems
  • H63 National Debt; Debt Management; Sovereign Debt
  • O11 Macroeconomic Analyses of Economic Development
  • O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance