DP13202 Rare Disasters, Financial Development, and Sovereign Debt

Author(s): Sérgio Rebelo, Neng Wang, Jinqiang Yang
Publication Date: September 2018
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 study the implications of the interaction between rare disasters and financial development for sovereign debt markets. In our model, countries vary in their financial development, by which we mean the extent to which shocks can be hedged in international capital markets. The model predicts that low levels of financial development generate a key feature of sovereign debt in emerging economies known as "debt intolerance": high credit spreads associated with lower debt-to-output ratios than those of developed countries.