Sovereign default and liquidity: The case for a world safe asset

This paper presents a positive and normative study of world financial market when sovereign countries can default on their debt. We construct tractable model that enables us to in general equilibrium. The amount safe assets is thus endogenous determined by international risk-sharing. characterize the equilibrium structure we show generate multiple equilibria. In addition, not constrained-efficient because do fully internalize value debt being used as liquidity. prove fund issuing asset increases aggregate welfare. fund's relationship with IMF's Special Drawing Rights discussed.