Borrowing into debt crises

• 成果类型: Article
• 署名作者: Paluszynski, Radoslaw; Stefanidis, Georgios
• 署名单位: University of Houston System; University of Houston; York University - Canada
• 刊物名称: QUANTITATIVE ECONOMICS
• ISSN/ISSBN: 1759-7323
• DOI: 10.3982/QE1797
• 发表日期: 2023
• 页码: 277-308
• 关键词: Sovereign default; long-term debt; public goods; F34; G15

摘要

Quantitative models of sovereign default predict that governments reduce borrowing during recessions to avoid debt crises. A prominent implication of this behavior is that the resulting interest rate spread volatility is counterfactually low. We propose that governments borrow into debt crises because of frictions in the adjustment of their expenditures. We develop a model of government good production, which uses public employment and intermediate consumption as inputs. The inputs have varying degrees of downward rigidity, which means that it is costly to reduce them. Facing an adverse income shock, the government borrows to smooth out the reduction in public employment, which results in increasing debt and higher spread. We quantify this rigidity using the OECD Government Accounts data and show that it explains about 70% of the missing bond spread volatility.