Self-Fulfilling Debt Crises, Revisited

Lack of commitment at the time auction to repayment imminently maturing debt can generate a run on and immediate default. We show that same lack leads other possible self-fulfilling crises, including issuance more depressed prices, or “sudden stop” (forced austerity) in which is sharply curtailed. Both outcomes stem from government's incentive eliminate uncertainty about imminent payments by altering level issuance. These large increase spread volatility both 1-period multiperiod quantitative model.