A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and...

This paper studies an economy with credit risk in which, as in Bizer and DeMarzo (1992), borrowers cannot commit to exclusive contracts with lenders. In contrast with Bizer and DeMarzo (1992), we study a framework with multiple borrowing periods. In particular, we remove the exclusive-contract...

We propose a sovereign default framework that allows us to quantify the importance of the debt dilution problem in accounting for overborrowing and sovereign default risk. We find that debt dilution accounts for 12% of the mean debt level and almost 100% of the sovereign default risk in the...

This paper studies an economy with credit risk in which borrowers cannot commit to exclusive contracts with lenders as in Bizer and DeMarzo (1992). But we study a framework with multiple borrowing periods. In particular, we remove the exclusive contracts assumption from a baseline model of...

We show that some recent sovereign debt restructurings were characterized by (i) the absence of missed debt payments prior to the restructurings, (ii) reductions in the government's debt burden, and (iii) increases in the market value of debt claims for holders of the restructured debt. Since...

During the last global recession, house prices fell in some European countries almost as much as in some U.S. states. However, mortgage defaults occurred at a much lower rate in Europe. The authors say the difference might be explained by two regulations that apply in Europe but are used on a...

Home equity did not increase much for households younger than 35 years of age between 1998 and 2007 because the increase in house prices was offset by an equivalent increase in mortgage debt.

Foreign investment is typically considered an important source of growth for developing countries. This article describes the legal protection granted to foreign investors and its enforcement mechanisms. Governments have signed international investment agreements intended to protect foreign...

Whether governments should issue GDP-indexed sovereign debt continues to be the subject of policy debates. This article contributes to this debate by studying the effects of issuing GDP-indexed sovereign debt contracts using the equilibrium default model studied by Aguiar and Gopinath (2006) and...

In this article, we study the interplay between political factors and default decisions. First, we survey two branches of theoretical studies. One shows that governments may be willing to repay their debt because it is in the best interest of local agents with political power. The other one...