Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86956
Authors: 
Juessen, Falko
Linnemann, Ludger
Schabert, Andreas
Year of Publication: 
2009
Series/Report no.: 
Tinbergen Institute Discussion Paper 09-102/2
Abstract: 
This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large.
Subjects: 
Sovereign default
asset pricing
fiscal policy
government debt
JEL: 
E62
G12
H6
E32
Document Type: 
Working Paper

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