Publication: Is inflation default? The role of information in debt crises
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2019-10-01
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American Economic Association
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Abstract
We study the information sensitivity of government debt denominated
in domestic versus foreign currency: the former is subject to inflation
risk and the latter to default. Default only affects sophisticated
bond traders, whereas inflation concerns a larger and less informed
group. Within a two-
period Bayesian trading game, differential
information manifests itself in the secondary market, and we display
conditions under which debt prices are more resilient to bad news
even in the primary market, where only sophisticated players operate.
Our results can explain debt prices across countries following
the 2008 financial crisis, and also provide a theory of “original sin.”
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Expectations, Speculations, International lending and debt problems, National debt, Debt management, Sovereign debt
Bibliographic citation
Bassetto, M., & Galli, C. (2019). Is Inflation Default? The Role of Information in Debt Crises. American Economic Review, 109 (10), pp. 3556-3584.