A Theory of Sovereign Debt Roll-over Crisis∗

In this paper, we attempt to provide theoretical investigation to debt roll-over crisis in government bond market. By using the global game techniques, we analyse coordination problem in debt auction. The approach in this paper allows us to have insight on the relation between occurrence of sovereign debt roll-over crisis and the fundamentals of economy which is not clearly explained in preceding works. This paper also makes it clear how the amount of debt for refinancing affects occurrence of sovereign debt roll-over crisis. Implications to policymakers are that they should pay attention to possible serious consequence of debt-bunching which usually grows gradually over time. In public debt management, the government decisions today affect the situation facing the government in the future via change in redemption schedules. Although the cost of debt roll-over crisis is not easy to gauge beforehand, its possibility should be noted by policymakers. ∗Preliminary version. I thank Amil Dasgupta, Francisco Penaranda, Guillaume Platin and Hyun Song Shin for discussions during the preparation of the paper. The views expressed herein are those of the author and do not necessarily reflect those of the organisations to which the author belongs.