Country Solidarity in Sovereign Crises

Tirole, Jean (2015) Country Solidarity in Sovereign Crises. American Economic Review (AER), vol.105 (n°8). pp. 2333-2363.

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Official URL: http://tse-fr.eu/pub/28967

Abstract

When will solidarity, which emerges spontaneously from the fear of spillovers, be reinforced through contracting? The optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing, a borrowing cap, but no joint liability. While joint liability augments total surplus, the borrowing country cannot compensate the deep-pocket guarantor. By contrast, the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability, provided that shocks are sufficiently independent, spillovers sufficiently large, liquidity needs moderate and available sanctions sufficiently tough.

Item Type: Article
Language: English
Date: 2015
Refereed: Yes
Uncontrolled Keywords: Sovereign debt, solidarity, joint liability, bailouts
JEL codes: E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
F34 - International Lending and Debt Problems
H63 - Debt; Debt Management
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:55
Last Modified: 24 Jan 2019 00:10
OAI ID: oai:tse-fr.eu:28967
URI: http://publications.ut-capitole.fr/id/eprint/16682

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