Self-fulfilling crises with default and devaluation

DOI10.1007/S00199-012-0702-6MaRDI QIDQ361822zbMATH OpenOpenAlexFDO

Authors José-María Da-Rocha, Eduardo-Luis Giménez, Francisco-Xavier Lores

Publication date 19 August 2013

Published in Economic Theory (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00199-012-0702-6

zbMATH Keywords

defaultdevaluationdynamic stochastic general equilibriumeconomic crisisgovernment debt policy

Mathematics Subject Classification ID

Dynamic stochastic general equilibrium theory (91B51) Economic dynamics (91B55) Macroeconomic theory (monetary models, models of taxation) (91B64)

Review text

The paper suggests a dynamic stochastic general equilibrium model (with discrete time) of defaults and devaluations in which self-fulfilling crises can arise. There are three types of agents in the economy: a continuum of identical consumers who invest (in domestic capital and in foreign securities), and pay taxes, a continuum of international bankers, and a government. The representative consumer's utility function is the expected infinite sum (on periods) of weighted sums of private and public consumptions. The individual banker's utility function is the expected infinite sum of weighted private consumptions. The governments object is to maximize the welfare of consumers. In every period the government chooses the level of government consumption and the real exchange rate, decides whether or not to default on its old debt, and sells debt. The bankers within each period choose to buy or not the debt. In each period, the value of an exogenous ``sunspot random factor is realized. The agents' decisions are defined via their value functions which are stochastic Bellman-type functions. These functions also define equilibrium of the economy. The equilibria existence and their properties at different assumptions are investigated. Theoretical results are demonstrated on character of the crisis in Argentina in 2001--2002.

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Cites work

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Cited in

(16)

• Applications of stochastic optimal control/dynamic programming to international finance and debt crises
• Government guarantees and self-fulfilling speculative attacks
• An apocalypse foretold: climate shocks and sovereign defaults
• Savings and default
• Self-fulfilling currency crises with borrowing constraints and domestic currency debt
• Efficient sovereign default
• Nominal sovereign debt
• Self-Fulfilling Debt Crises
• Disastrous Defaults
• Monetary independence and rollover crises
• Bubbles and Self-Enforcing Debt
• Introduction to the special issue on models of debt and debt crises
• The productivity cost of sovereign default: evidence from the European debt crisis
• Fiscal austerity during debt crises
• Gambling for redemption and self-fulfilling debt crises
• Devaluation, debt, and default in emerging economies

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