Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt

FRB Richmond Working Paper No. 13-08

18 Pages Posted: 17 Jul 2013

See all articles by Juan Carlos Hatchondo

Juan Carlos Hatchondo

Indiana University Bloomington

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute

Date Written: July 15, 2013

Abstract

We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: Governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.

Keywords: sovereign debt, default, sudden stops, debt dilution, time inconsistency, debt maturity

Suggested Citation

Hatchondo, Juan Carlos and Martinez, Leonardo, Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt (July 15, 2013). FRB Richmond Working Paper No. 13-08, Available at SSRN: https://ssrn.com/abstract=2294614 or http://dx.doi.org/10.2139/ssrn.2294614

Juan Carlos Hatchondo (Contact Author)

Indiana University Bloomington ( email )

Dept of Biology
100 South Indiana Ave.
Bloomington, IN 47405
United States

Leonardo Martinez

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

HOME PAGE: http://works.bepress.com/leonardo_martinez/

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