borrowers misprice the option to default with a U-shaped negative pricing error. The myopia discount changes the optimal bailout … policy. Myopia gets punished when the distortions from default mispricing outweigh the future bailout costs, resulting in … procrastinated default and protracted crises. The model shows that (i) myopia is an important determinant for bailout policy, (ii …

open economy requests a bailout from an international financial institution, it receives a non-defaultable loan of size G … that comes with imposed debt limits. The government endogenously asks for the bailout during recessions and repays it when … the economy recovers. Hence, the bailout acts as an imperfect state contingent asset that makes the economy better off …