TY  - JOUR
AU  - Arellano,Cristina
AU  - Kocherlakota,Narayana R.
TI  - Internal Debt Crises and Sovereign Defaults
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13794
PY  - 2008
Y2  - February 2008
UR  - http://www.nber.org/papers/w13794
L1  - http://www.nber.org/papers/w13794.pdf
N1  - Author contact info:
Cristina Arellano
Department of Economics
University of Minnesota
4-101 Hanson Hall
1925 Fourth Street South
Minneapolis, MN 55455
Tel: 612/625-0511
Fax: 612/204-5276
E-Mail: arellano.cristina@gmail.com

Narayana R. Kocherlakota
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55401
Tel: 612-204-5444
E-Mail: narayana.kocherlakota@mpls.frb.org
AB  - In this paper, we use data from developing countries to argue that sovereign defaults are often caused by fiscal pressures generated by large-scale domestic defaults. We argue that these systemic domestic defaults are caused by shocks best interpreted as being non-fundamental. We construct a model that is consistent with these observations. The key ingredient of the model is that it is impossible to liquidate large amounts of entrepreneurial assets. This restriction generates the possibility of a domestic coordinated default crisis, in which domestic borrowers find it optimal to default because all other borrowers are also defaulting. We conclude that avoiding sovereign defaults requires better internal institutions, not better external ones.
ER  -