Birds Of A Feather: Separating Spillovers From Shocks In Sovereign Default
Contagion, Debt crisis, IMF, Optimal bailout, Sovereign default
Annals of Finance
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 of Economics
Original Publication Date
DOI of published version
UNI ScholarWorks, Rod Library, University of Northern Iowa
Rudderham, Ryan, "Birds Of A Feather: Separating Spillovers From Shocks In Sovereign Default" (2021). Faculty Publications. 33.