Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/260818 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9688
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper focuses on the debt recovery channel linking the dynamics of public debt to partial sovereign defaults. We build a simple model which incorporates sovereign default and a debt recovery rule. It depends on a parameter that allows for partial debt recovery. We show that the maximum debt-to-GDP ratio that a country can sustain without defaulting is increasing, nonlinear, and sensitive to the debt-recovery parameter. A higher debt recovery parameter increases the fiscal space but worsens the financial position of a borrowing country after a default episode. We show the empirical relevance of this channel for estimating country-specific fiscal spaces.
Document Type: 
Working Paper
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