This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings...

We systematically compare sovereign defaults on debt issued externally and domestically. Defaults at home and abroad are equally frequent, and governments often default selectively. Compared to domestic defaults, external defaults are larger and take longer to resolve. Both external and domestic...