This paper studies the effects of government capital accumulation on sovereign debt default risk and debt restructuring renegotiation outcomes when government has limited ability to extract revenues from households. We develop a quantitative dynamic stochastic general equilibrium model of...

We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability...

This paper studies how the currency composition of public debt affects debt sustainability in developing countries. We show empirically that the debt-to-GDP ratio tends to grow at a faster rate when countries with a high share of foreign currency debt face a currency depreciation. The paper also...

This paper studies the impact of the state-dependent risk of a government default on the correlation of the scal balance and current account. We use a small open economy model where nonlinear risk premia arise endogenously when the government operates close to its scal limit, i.e. the maximum...

We analyse the impact of interactions between monetary and fiscal policy on macroeconomic stability. We find that in the presence of sovereign default beliefs a monetary policy, which aims to stabilize inflation through an active interest rate policy, will destabilize the economy if the feedback...

Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the...

In this paper, the author considers the sovereign debt in the form of one-period government bonds with default risk, which can be purchased by and traded among domestic and foreign investors. She shows that the weight assigned to the lenders' interest by the borrowing government at the time of...

Highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments borrow with an interest rate penalty to compensate lenders for default risk. Although reducing external debt to the same extent as international reserves would...

This study develops a dynamic stochastic general equilibrium model to account for the differences in fiscal policy stance over the business cycle between developed and emerging market countries, and, in particular, for the volatile and procyclical government consumption and transfer payment in...

We study how debt limits can be expansionary in economies facing sovereign risk. We develop a sovereign debt model with capital accumulation, long-term debt, and fiscal rules that features two distortions: debt dilution and a pecuniary externality of private investment on spreads. The optimal...