Sovereign debt spread and default in a model with self fullfilling prophecies ans asymmetric information - Sciences Po Access content directly
Preprints, Working Papers, ... Year : 2015

Sovereign debt spread and default in a model with self fullfilling prophecies ans asymmetric information

Abstract

The outbreak of the Greek crisis has revived the literature on the sovereign debt spreads. Recent evidence has shed new lights on the main determinants of interest rates spreads. The sharp increase of government bond yields cannot be entirely attributed to changes in macroeconomic fundamentals. Contagion effects can occur and self-fulfilling speculation may arise. Yet, this literature has been mainly empirical and needs sound theoretical foundations. The aim of this paper is to fill in this gap. We develop a simple model in the spirit of second generation currency crises models developed by (Obstfled, 1996). The model describes a strategic game between governments and financial markets. Eurozone countries face a trade-off as governments may either commit and implement restrictive fiscal policies or default on debt. The cost of the commitment strategy increases when interest rates increase or when the fiscal multipliers are high. This leaves the opportunity for speculators to drive the economy towards a bad equilibrium, forcing the government to renege its commitment. We introduce a source of uncertainty about the cost of default in the model. By this way, we may introduce the possibility that governments do not default although risk premiums on bond yield is high.
Fichier principal
Vignette du fichier
wp2015-04.pdf (752.67 Ko) Télécharger le fichier
Origin Publisher files allowed on an open archive

Dates and versions

hal-03389332 , version 1 (20-10-2021)

Identifiers

Cite

Christophe Blot, Bruno Ducoudre, Xavier Timbeau. Sovereign debt spread and default in a model with self fullfilling prophecies ans asymmetric information. 2015. ⟨hal-03389332⟩
26 View
19 Download

Share

Gmail Mastodon Facebook X LinkedIn More