Discussion Paper Details

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Title: Rare Disasters, Financial Development, and Sovereign Debt

Author(s): Sérgio Rebelo, Neng Wang and Jinqiang Yang

Publication Date: September 2018

Keyword(s): Financial Development and Sovereign debt

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: We propose a model of sovereign debt where countries vary in their level of financial development, defined as the extent to which countries can hedge rare disasters in in- ternational capital markets. We show that low levels of financial development generate the "debt intolerance" phenomenon that plagues emerging markets: it reduces debt capacity, increases credit spreads, and limits the ability to smooth consumption.

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Bibliographic Reference

Rebelo, S, Wang, N and Yang, J. 2018. 'Rare Disasters, Financial Development, and Sovereign Debt'. London, Centre for Economic Policy Research.