The financial crisis of 2007-2008 and the current sovereign debt crisis in Europe have focused attention on the macroeconomic consequences of debt financing. In this paper, we turn our attention to the use of debt finance in the corporate sector and study the generalequilibrium effects of debt finance on investment and growth. More precisely, we analyze underinvestment in equilibrium when marke...

rise in most European countries – North and South, East and West – and that they resort to anti-EU rhetoric to increase their political and electoral support. The combination of the global financial and economic crises (since 2008) with the specifically European sovereign debt crisis (since 2010) has only strengthened this trend. It is equally undeniable that mainstream parties now embrace some...

The European sovereign debt crisis has impaired many European banks. The distress on the European banks may transmit worldwide, and result in a large-scale knock-on default of financial institutions. This study presents a computer simulation model to analyze the risk of insolvency of banks and the consequent knock-on defaults in a bank credit network. Simulation experiments quantify the worst i...

This paper proposes a method to asses the potential problems of sustainability of a country’s sovereign debt. We claim that the relevant variables used for this analysis are typically subject to changes which are associated with changes in macroeconomics policies. We propose a procedure for identifying periods under which the trade deficit and the current account accumulate at a nonstationary r...

I. OPERATIONALIZING “DEBT SUSTAINABILITY”........................................................ 2 II. PROCESS ISSUES IN MANAGING SOVEREIGN DEBT ................................................ 7 III. PRACTICAL WAYS TO CONTAIN RISK AND REDUCE UNCERTAINTY ............... 10 References ..................................................................................................................

SHOULD THERE BE a sovereign bankruptcy procedure for countries in financial distress? This paper explores the use of U.S. bankruptcy law as a model for a sovereign bankruptcy procedure and asks whether adoption of such a procedure would lead to a more orderly process of sovereign debt restructuring. It assumes that a quick and orderly debt restructuring process is more efficient than a prolonge...

The initial government debt-to-GDP ratio and the government’s commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt impl...

Economic analyses of of corporate finance, money, and sovereign debt are largely considered separately. I introduce a novel corporate finance framing that focuses on financial constraints at corporate and country levels, making explicit the tradeoffs involved in relying on domestic versus foreign-currency debt to finance investments or government expenditures. The new framework provides new ins...

Emerging market countries increasingly issue nominal government debt. At the same time, these countries experience sovereign debt crises with default and high inflation. This paper studies the implications of debt denomination for sovereign default and inflation policies. Using bond-level data on government borrowing, I show that default and inflation rates vary systematically with debt denomin...

Inspired by the European debt crisis of 2010, this paper provides a theoretical framework to analyze the dynamics of the sovereign debt ∗This is preliminary indeed. The results have not yet been checked with sufficient care, despite multiple presentations of earlier drafts. We are thankful to our discussants so far. We are particularly thankful for an insightful discussion by Fernando Broner at...