Sovereign Default and Liquidity: The Case for a World Safe Asset - Sciences Po Access content directly
Journal Articles Journal of International Economics Year : 2021

Sovereign Default and Liquidity: The Case for a World Safe Asset

Abstract

This paper presents a positive and normative study of a world financial market when sovereign countries can default on their debt. We construct a tractable model that enables us to study sovereign default in general equilibrium. The amount of safe assets is thus endogenous and determined by international risk-sharing. We characterize the equilibrium structure and we show that the market equilibrium can generate multiple equilibria. In addition, the market equilibrium is not constrained-efficient because countries do not fully internalize the value of their debt being used as liquidity. We prove that a world fund issuing a safe asset increases aggregate welfare. The fund's relationship with the IMF's Special Drawing Rights is discussed.
Fichier principal
Vignette du fichier
2021-LeGrand_Ragot_Sovereign default and liquidity.pdf (798.73 Ko) Télécharger le fichier

Dates and versions

hal-03501397 , version 1 (30-12-2021)

Licence

Attribution - NonCommercial - NoDerivatives

Identifiers

Cite

François Le Grand, Xavier Ragot. Sovereign Default and Liquidity: The Case for a World Safe Asset. Journal of International Economics, 2021, 131, pp.103462. ⟨10.1016/j.jinteco.2021.103462⟩. ⟨hal-03501397⟩
34 View
80 Download

Altmetric

Share

Gmail Facebook X LinkedIn More