Arbeitspapier

Optimal sovereign default

When is it optimal for a government to default on its legal repayment obligations? We answer this question for a small open economy with domestic production risk in which contracting frictions make it optimal for the government to finance itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally deviate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to significant 'default costs'. Optimal default improves the international diversification of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - significantly increases welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to domestic output, and that following such shocks default can be Ramsey optimal even if the net foreign asset position is positive.

ISBN
978-3-86558-896-8
Sprache
Englisch

Erschienen in
Series: Bundesbank Discussion Paper ; No. 09/2013

Klassifikation
Wirtschaft
Fiscal Policy
International Lending and Debt Problems
Thema
Fiscal Policy
Sovereign Risk

Ereignis
Geistige Schöpfung
(wer)
Adam, Klaus
Grill, Michael
Ereignis
Veröffentlichung
(wer)
Deutsche Bundesbank
(wo)
Frankfurt a. M.
(wann)
2013

Handle
Letzte Aktualisierung
10.03.2025, 11:43 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Adam, Klaus
  • Grill, Michael
  • Deutsche Bundesbank

Entstanden

  • 2013

Ähnliche Objekte (12)