We analyze determinants of sovereign bond yields in 22 advanced economies over the 1980–2010 period using panel cointegration techniques. The application of the cointegration methodology allows distinguishing between long-run (debt-to-GDP ratio, potential growth) and short-run (inflation, short-term interest rates, etc.) determinants of sovereign borrowing costs. We find that in the long run, g...

a r t i c l e i n f o This paper studies the monetary policy trade-off between low inflation and low sovereign risk in the environment where fiscal authorities fail to fully ensure the sustainability of government debt. Building on the Fiscal Theory of Price Level (FTPL) and the Fiscal Theory of Sovereign Risk (FTSR), this paper differs in its baseline assumption about the monetary policy objec...

In this paper, I develop a theoretical model to analyze the optimal choice between bank loans and bond finance for a sovereign debtor. The model describes a market that is subject to moral hazard and adverse selection. I model the choice between the two debt instruments allowing for debt renegotiation in the event of financial distress, with the possibility of default. The model incorporates pr...

The roots of the Euro area crisis can be traced back to at least the summer of 2007. Although not picked up by the credit rating agencies until much later, the probability of default on sovereign debt increased in parallel with clear macroeconomic misalignments. These misalignments include recession-triggered budget deficits, bailout-motivated fiscal measures,1 as well as country-specific strat...

The East Asian crisis of 1997-99 was essentially the external debt problems between financial institutions in both host and recipient countries, while the crises in other emerging market economies—such as Russia (1998), Brazil (1999) and Argentina (2001)—were associated with the external debt problems between sovereign borrowers and private investors. Although both crises were triggered by a re...

In this paper we investigate the dynamics of European government bond market contagion during the financial crisis and, subsequently, during the European sovereign debt crisis. Following Bae et al. (2003), we use the coexceedance variable—joint occurrences of extreme negative and positive returns in different countries on a given day—to measure contagion. We also analyze the underlying determin...

We address the question of whether and how a sovereign should reduce its external indebtedness when default is a significant possibility, with a particular focus on whether a sovereign should buy back or dilute existing long-term sovereign bonds. Our main finding is that when reduction of debt is optimal, the sovereign should remain passive in the long-term bond market during the deleveraging p...

We explore the role of inflation credibility in self-fulfilling debt crises. In particular, we propose a continuous time model of nominal debt with the potential for selffulfilling debt crises as in Calvo (1988) and Cole and Kehoe (2000). We characterize crisis equilibria conditional on the level of commitment to low inflation. With strong commitment, which can be interpreted as joining a monet...

We present a continuous time model of sovereign debt with the possibility to renegotiate once the terms of the contract. Renegotiations consist of a debt reduction or a debt rescheduling. The model provides closed-form solutions for debt values with endogenous default policy and renegotiations terms. Simulations indicate that both reduction and rescheduling deals allow the lender and the sovere...