Sudden stops, time inconsistency, and the duration of sovereign debt

By Juan Carlos Hatchondo, Leonardo Martinez

July 19, 2013

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Format: Chicago

Juan Carlos Hatchondo, and Leonardo Martinez. Sudden stops, time inconsistency, and the duration of sovereign debt, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances off 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.

Subject: Asset and liability management, Asset prices, Balance of payments, Bonds, Debt dilution, Financial institutions, National accounts, Personal income, Prices, Sudden stops

Keywords: Asset prices, Bond-price function, Bonds, Debt composition, Debt dilution, Debt dilution problem, Debt duration, Debt level, Debt maturity, Debt obligation, Default, Income loss, Long-term debt, Personal income, Probability default exclusion, Sovereign debt, Sudden stops, Time inconsistency, WP

Publication Details

Pages:

17
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/174
Stock No:

WPIEA2013174
ISBN:

9781475586176
ISSN:

1018-5941

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