The Twin Ds: Optimal Default and Devaluation
A salient characteristic of sovereign defaults is that they are typically accompanied by large devaluations. This paper presents new evidence of this empirical regularity known as the Twin Ds and proposes a model that rationalizes it as an optimal policy outcome. The model combines limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default is shown to occur during con- tractions. The role of default is to free up resources for domestic absorption, and the role of exchange-rate devaluation is to lower the real value of wages, thereby reducing involuntary unemployment.
-
-
Copy CitationSeunghoon Na, Stephanie Schmitt-Grohé, Martin Uribe, and Vivian Z. Yue, "The Twin Ds: Optimal Default and Devaluation," NBER Working Paper 20314 (2014), https://doi.org/10.3386/w20314.Download Citation
-
Published Versions
Seunghoon Na & Stephanie Schmitt-Grohé & Martín Uribe & Vivian Yue, 2018. "The Twin Ds: Optimal Default and Devaluation," American Economic Review, vol 108(7), pages 1773-1819. citation courtesy of 
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
