Research seminar: Enrico Mallucci (Board of Governors of the Federal Reserve)

Title: "Avoiding Sovereign Default Contagion: A Normative Analysis"

  • Date: 12 December 2023 from 12:00 to 13:15

  • Event location: Auditorium - Piazza Scaravilli, 1 + Microsoft Teams Meeting


Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard and reduce welfare. Second, we look at the borrowing choices of a global central borrower and show that it borrows less than individual governments. Central borrower's policies improve welfare and can be replicated in a decentralized setting with Pigouvian taxes on debt. Timing, however, is crucial, as countries are more likely  to implement central borrower's policies in bad times.