DP13202 Rare Disasters, Financial Development, and Sovereign Debt
|Author(s):||Sérgio Rebelo, Neng Wang, Jinqiang Yang|
|Publication Date:||September 2018|
|Date Revised:||August 2019|
|Keyword(s):||Financial Development, Sovereign debt|
|Programme Areas:||Financial Economics, International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13202|
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.