Can Debt Crises Be Self-Fulfilling?

Author/Editor:

Marcos d Chamon

Publication Date:

June 1, 2004

Electronic Access:

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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:

Several papers argue that debt crises can be the result of self-fulfilling expectations that no one will lend to a country. I show this type of coordination failure can be eliminated by a combination of state-contingent securities and a mechanism that allows investors to promise to lend only if enough other investors do so as well. This suggests that runs on the debt of a single borrower (such as the government) can be eliminated, and that self-fulfilling features are more plausible when articulated in a context in which externalities among many decentralized borrowers allow for economy-wide debt runs to occur.

Series:

Working Paper No. 2004/099

Subject:

Bonds Credit Debt default Financial crises Securities

English

Publication Date:

June 1, 2004

ISBN/ISSN:

9781451852301/1018-5941

Stock No:

WPIEA0992004

Pages:

21

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