Faculty Publications

Birds Of A Feather: Separating Spillovers From Shocks In Sovereign Default

Document Type

Article

Keywords

Contagion, Debt crisis, IMF, Optimal bailout, Sovereign default

Journal/Book/Conference Title

Annals of Finance

Volume

17

Issue

3

First Page

353

Last Page

378

Abstract

In this paper, I propose a tractable model of sovereign default and the inter-state spillovers emanating from default. A coalition of nations may choose to insure against default, and the behavior of the coalition is used to examine the magnitude of the international spillovers. A voting structure for the coalition is proposed to examine idiosyncratic spillovers. The model is calibrated to the recent Greek Debt crisis to understand the spillovers from a default, and the moral hazard effect of the Troika. I find that spillover effects are large. If the rest of the world defaulted, this would create a loss equivalent to a permanent 9% decrease in government spending. Counterfactual experiments reveal that default would be prevalent without the IMF, suggesting that the own-penalty to defaulting has decreased since the IMF’s creation.

Department

Department of Economics

Original Publication Date

9-1-2021

DOI of published version

10.1007/s10436-021-00392-6

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Language

en

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