Internal Debt Crises and Sovereign Defaults

Cristina Arellano and Narayana Kocherlakota

No 13794, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we use data from developing countries to argue that sovereign defaults are often caused by fiscal pressures generated by large-scale domestic defaults. We argue that these systemic domestic defaults are caused by shocks best interpreted as being non-fundamental. We construct a model that is consistent with these observations. The key ingredient of the model is that it is impossible to liquidate large amounts of entrepreneurial assets. This restriction generates the possibility of a domestic coordinated default crisis, in which domestic borrowers find it optimal to default because all other borrowers are also defaulting. We conclude that avoiding sovereign defaults requires better internal institutions, not better external ones.

JEL-codes: F34 G33 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-dev and nep-dge
Note: EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Published as Arellano, Cristina & Kocherlakota, Narayana, 2014. "Internal debt crises and sovereign defaults," Journal of Monetary Economics, Elsevier, vol. 68(S), pages S68-S80.

Downloads: (external link)
http://www.nber.org/papers/w13794.pdf (application/pdf)

Related works:
Journal Article: Internal debt crises and sovereign defaults (2014)
Working Paper: Internal Debt Crises and Sovereign Defaults (2008)
Working Paper: Internal Debt Crises and Sovereign Defaults (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:13794

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w13794

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().