Corsetti, G. and Maeng, S. H.
Debt Crises, Fast and Slow
CWPE2009
Abstract: We build a dynamic model to study how shifts in investors’ beliefs can drive either slow-moving debt crises or rollover crises. We show that the threat of slow-moving crises does not necessarily motivate deleveraging: in a recession, unless debt is close enough to the threshold at which the economy becomes vulnerable to such crises, optimizing governments keep borrowing, gambling on economic recovery. The incentive to deleverage is instead strong when the economy is vulnerable to rollover crises at low levels of debt. We show that equilibrium multiplicity remains pervasive independently of bond maturity. In general, short maturities induce more deleveraging.
Keywords: Sovereign default, Self-fulfilling crises, Expectations, Debt sustainability
JEL Codes: E43 E62 H50 H63
Author links: Giancarlo Corsetti Fred Seunghyun Maeng - Winner of CERF best student paper award
PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2009.pdf 
Open Access Link: https://doi.org/10.17863/CAM.52416
Keynes Fund Project(s):
The Making of the Euro-area Crisis: Lessons from Theory and History (JHLP)
