Sudden stops, time inconsistency, and the duration of sovereign debt

Juan Carlos Hatchondo and Leonardo Martinez

No 2013/174, IMF Working Papers from International Monetary Fund

Abstract: We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances off increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.

Keywords: WP; long-term debt; sovereign debt; default; sudden stops; debt dilution; time inconsistency; debt maturity; debt duration; debt dilution problem; debt composition; income loss; probability default exclusion; debt obligation; bond-price function; debt level; Personal income; Asset prices; Bonds (search for similar items in EconPapers)
Pages: 17
Date: 2013-07-19
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt (2013)
Working Paper: Sudden stops, time inconsistency, and the duration of sovereign debt (2013)
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