Publication:
Is inflation default? The role of information in debt crises

Loading...
Thumbnail Image
Identifiers
Publication date
2019-10-01
Defense date
Advisors
Tutors
Journal Title
Journal ISSN
Volume Title
Publisher
American Economic Association
Impact
Google Scholar
Export
Research Projects
Organizational Units
Journal Issue
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.”
Description
Keywords
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.