DP13202 Rare Disasters, Financial Development, and Sovereign Debt

Author(s): Sérgio Rebelo, Neng Wang, Jinqiang Yang
Publication Date: September 2018
Date Revised: February 2021
Keyword(s): Financial Development, Sovereign debt
JEL(s): F34
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 in which countries vary in their level of financial development, defined as the extent to which they can issue debt denominated in domestic currency in international capital markets. We show that low levels of financial development generate the "debt intolerance'' phenomenon that plagues emerging markets: it reduces overall debt capacity, increases credit spreads, and limits the country's ability to smooth consumption.