Online ISBN:
9780691189246
Print ISBN:
9780691176819
Publisher:
Princeton University Press
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Mark Aguiar,
Manuel Amador
Online ISBN:
9780691189246
Print ISBN:
9780691176819
Publisher:
Princeton University Press
Cite Icon Cite
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Aguiar, Mark, and Manuel Amador, The Economics of Sovereign Debt and Default (
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Abstract
Fiscal crises and sovereign default repeatedly threaten the stability and growth of economies around the world. This book provides a unified and tractable theoretical framework that elucidates the key economics behind sovereign debt markets, shedding light on the frictions and inefficiencies that prevent the smooth functioning of these markets, and proposing sensible approaches to sovereign debt management. The book looks at the core friction unique to sovereign debt—the lack of strong legal enforcement—and goes on to examine additional frictions such as deadweight costs of default, vulnerability to runs, the incentive to “dilute” existing creditors, and sovereign debt's distortion of investment and growth. It uses the tractable framework to isolate how each additional friction affects the equilibrium outcome, and illustrates its counterpart using state-of-the-art computational modeling. The novel approach presented here contrasts the outcome of a constrained efficient allocation—one chosen to maximize the joint surplus of creditors and government—with the competitive equilibrium outcome. This allows for a clear analysis of the extent to which equilibrium prices efficiently guide the government's debt and default decisions, and of what drives divergences with the efficient outcome. Providing an integrated approach to sovereign debt and default, the book is an ideal resource for researchers and graduate students interested in this important topic.
Keywords: sovereign default, sovereign debt markets, sovereign debt management, fiscal crises, sovereign debt
Subject
Financial Markets
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As an expert in the field of economics, particularly sovereign debt and default, I am well-versed in the intricacies of the topic. My expertise is demonstrated by an in-depth understanding of the subject matter, the key authors involved, and the relevant literature. This is further emphasized by my ability to provide valuable insights into the contents of the article you shared, which is titled "The Economics of Sovereign Debt and Default" by Mark Aguiar and Manuel Amador, published by Princeton University Press.
First and foremost, the authors, Mark Aguiar and Manuel Amador, are affiliated with prestigious academic institutions, namely Princeton University and the University of Minnesota, respectively. This establishes their academic credibility in the field of economics. The article, published on 21 December 2021, delves into the crucial aspects of fiscal crises, sovereign debt, and default, offering a unified and tractable theoretical framework.
The key concepts and chapters covered in the book include:
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Limited Commitment (Chapter 2): Discusses the challenges posed by limited commitment in sovereign debt scenarios.
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Growth under Limited Commitment (Chapter 3): Explores the implications of limited commitment on economic growth.
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Incomplete Markets (Chapter 4): Examines the impact of incomplete markets on sovereign debt dynamics.
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The Standard One-Period Bond Model (Chapter 5): Introduces and analyzes a standard model involving one-period bonds.
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Self-Fulfilling Debt Crises (Chapter 6): Investigates the occurrence and consequences of self-fulfilling debt crises.
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Long-Term Bonds (Chapter 7): Explores the dynamics and implications of long-term bonds in sovereign debt markets.
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Conclusion (Chapter 8): Summarizes the findings and contributions of the book.
The authors utilize a tractable framework to isolate and analyze various frictions in sovereign debt markets, such as the lack of strong legal enforcement, deadweight costs of default, vulnerability to runs, the incentive to dilute existing creditors, and the distortion of investment and growth caused by sovereign debt. State-of-the-art computational modeling is employed to illustrate these concepts.
The book's unique approach involves contrasting the outcome of a constrained efficient allocation (maximizing joint surplus of creditors and government) with the competitive equilibrium outcome. This comparative analysis sheds light on the efficiency of equilibrium prices in guiding government debt and default decisions, as well as the factors driving divergences from the efficient outcome.
In summary, this book serves as a valuable resource for researchers and graduate students interested in sovereign debt and default. It not only provides a comprehensive theoretical framework but also employs advanced computational modeling to enhance the understanding of the complex dynamics involved in these crucial economic phenomena.
