NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Pablo D'Erasmo

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September 2013Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default
with Enrique G. Mendoza: w19477
The European debt crisis shares features of the historical episodes of outright default on domestic public debt identified by Reinhart and Rogoff (2008) as a forgotten research subject. This paper proposes a theory of domestic sovereign default in which a government chooses debt and default optimally, responding to distributional incentives affecting the welfare of risk-averse agents who are heterogeneous in wealth. Equilibria with debt do not exist if the government is utilitarian and default is costless. Adding an exogenous default cost, the model supports equilibria with debt exposed to default risk in which debt falls as wealth inequality rises. A quantitative experiment calibrated to Europe shows that, in the observed range of inequality in bond holdings, the model accounts for 1/3rd ...

Forthcoming: Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default, Pablo D’Erasmo, Enrique G. Mendoza. in Sovereign Debt and Financial Crisis, Kalemli-Ozcan, Reinhart, and Rogoff. 2014

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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