{
  "title": "Sudden stops, time inconsistency, and the duration of sovereign debt",
  "publication": "IMF Working Papers, July 19, 2013",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/sudden-stops-time-inconsistency-and-the-duration-of-sovereign-debt-40805",
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  "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.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Study context: sovereign debt duration chosen by the government within a standard model of sovereign default.\n- Government trade-off examined:\n  - Increase duration of debt to mitigate rollover risk.\n  - Lower duration to mitigate the debt dilution problem."
    },
    {
      "heading": "Main findings",
      "content": "- When the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year.\n- Time inconsistency result: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially."
    },
    {
      "heading": "Mechanisms and trade-offs",
      "content": "- Rollover risk: longer-duration debt reduces the probability and impact of rollover crises (sudden stops).\n- Debt dilution problem: longer maturity increases the dilution of existing debt claims, creating incentives to shorten duration.\n- Sequential decision-making amplifies sudden-stop considerations, leading to longer chosen durations relative to a commitment benchmark."
    },
    {
      "heading": "Implications for sovereign debt management",
      "content": "- Sudden-stop risk can bias sequential decision-making toward longer maturities by an exact margin of 1 year.\n- Commitment mechanisms that credibly shorten chosen duration by 1.7 years relative to sequential choices could mitigate time inconsistency and reduce debt dilution concerns.\n\nSource: Sudden stops, time inconsistency, and the duration of sovereign debt, Juan Carlos Hatchondo and Leonardo Martinez, July 19, 2013.\n\n---\n\n Content in this bundle\n\n- wp13174\n  - wp13174 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp13174 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/sudden-stops-time-inconsistency-and-the-duration-of-sovereign-debt-40805"
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    "Authors: Juan Carlos Hatchondo, Leonardo Martinez",
    "Published: July 19, 2013",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475586176.001",
    "Study context: sovereign debt duration chosen by the government within a standard model of sovereign default.",
    "Government trade-off examined:",
    "When the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year.",
    "Time inconsistency result: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.",
    "Rollover risk: longer-duration debt reduces the probability and impact of rollover crises (sudden stops).",
    "Debt dilution problem: longer maturity increases the dilution of existing debt claims, creating incentives to shorten duration.",
    "Sequential decision-making amplifies sudden-stop considerations, leading to longer chosen durations relative to a commitment benchmark.",
    "Sudden-stop risk can bias sequential decision-making toward longer maturities by an exact margin of 1 year.",
    "Commitment mechanisms that credibly shorten chosen duration by 1.7 years relative to sequential choices could mitigate time inconsistency and reduce debt dilution concerns.",
    "**_wp13174**"
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