External and Public Debt Crises
The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions.
We thank Martin Eichenbaum and Jonathan Parker for helpful comments and Aaron Kirkman for excellent research assistance. Wright thanks the National Science Foundation for support under grant SES-1059829. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Minneapolis, the Federal Reserve System, or the National Bureau of Economic Research.