Online ISBN:
9780691189246
Print ISBN:
9780691176819
Publisher:
Princeton University Press
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Mark Aguiar,
Manuel Amador
Manuel Amador
University of Minnesota
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Oxford Academic
Published:
21 December 2021
Online ISBN:
9780691189246
Print ISBN:
9780691176819
Publisher:
Princeton University Press
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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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I'm an expert in the field of sovereign debt and default, with a deep understanding of the economic principles discussed in the book "The Economics of Sovereign Debt and Default" by Mark Aguiar and Manuel Amador, published by Princeton University Press.
The book addresses the recurring threats of fiscal crises and sovereign default that impact economies globally. It provides a unified and tractable theoretical framework to elucidate the key economics behind sovereign debt markets, uncovering the frictions and inefficiencies that hinder their smooth functioning. The authors propose sensible approaches to sovereign debt management, considering factors 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.
The chapters cover various essential concepts, including limited commitment, growth under limited commitment, incomplete markets, the standard one-period bond model, self-fulfilling debt crises, and long-term bonds. The book employs state-of-the-art computational modeling to illustrate how each additional friction affects the equilibrium outcome.
The novel approach presented in the book contrasts the outcome of a constrained efficient allocation (maximizing the joint surplus of creditors and government) with the competitive equilibrium outcome. This analysis allows for a clear understanding of how equilibrium prices guide government debt and default decisions and what factors drive divergences from the efficient outcome.
In summary, the book serves as an integrated resource for researchers and graduate students interested in sovereign debt and default, providing a comprehensive understanding of the economic dynamics involved in these critical aspects of financial markets.
