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

Author/Editor: Juan Carlos Hatchondo ; Leonardo Martinez
Publication Date: July 19, 2013
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 13/174
Subject(s): Sovereign debt | Borrowing | Economic models

Publication Date: July 19, 2013
ISBN/ISSN: 9781475586176/1018-5941 Format: Paper
Stock No: WPIEA2013174 Pages: 17
US$18.00 (Academic Rate:
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