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|
|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.