A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and...

This paper develops a non-linear DSGE model to assess the interaction between ex-post interventions in credit markets and the build-up of risk ex ante. During a systemic crisis, bailouts to the financial sector relax balance sheet constraints and accelerate the economic recovery. Ex ante, the...