publication . Book . 2015

Sovereign risk, private credit, and stabilization policies\ud

Pancrazi, Roberto; Seonane, Hernan D.; Vukotić, Marija;
Open Access English
  • Published: 02 Mar 2015
  • Publisher: University of Warwick. Department of Economics
  • Country: United Kingdom
In this paper we examine the impact of bailout policies in small open economies that are subject to financial frictions. We extend standard endogenous default models in two ways. First, we augment the government’s choice set with a bailout option. In addition to the standard choice of defaulting or repaying the debt, a government can also choose to ask for third-party bailout, which comes at a cost of an imposed borrowing limit. Second, we introduce financial frictions and a financial intermediation channel, which tie conditions on the private credit market to the conditions on the sovereign credit market. This link has been very strong in European countries dur...
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