TY  - BOOK
AU  - D'Erasmo,Pablo
AU  - Mendoza,Enrique G.
ED  - National Bureau of Economic Research.
TI  - History Remembered: Optimal Sovereign Default on Domestic and External Debt 
T2  - NBER working paper series
PY  - 2018///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - September 2018; Hardcopy version available to institutional subscribers
N2  - Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in Macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives v. the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency), and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply
UR  - https://www.nber.org/papers/w25073
UR  - http://dx.doi.org/10.3386/w25073
ER  -