This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Journal: Macroeconomics
  4. January 2017
  5. Optimal Sovereign Default

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Optimal Sovereign Default

  • Klaus Adam
  • Michael Grill
American Economic Journal: Macroeconomics
vol. 9, no. 1, January 2017
(pp. 128–64)
Download Full Text PDF

Abstract

When is it optimal for a fully committed government to default on its legal repayment obligations? Considering a small open economy with domestic production risk and noncontingent government debt, we show that it is ex ante optimal to occasionally deviate from the legal repayment obligation and to repay debt only partially. This holds true even if default generates significant deadweight costs ex post. A quantitative analysis reveals that default is optimal only in response to persistent disaster-like shocks to domestic output. Applying the framework to the situation in Greece, we find that optimal default policies suggest a considerably larger and more timely default than the one actually implemented in the year 2012.

Citation

Adam, Klaus, and Michael Grill. 2017. "Optimal Sovereign Default." American Economic Journal: Macroeconomics, 9 (1): 128–64. DOI: 10.1257/mac.20140093

Additional Materials

JEL Classification

  • E23 Macroeconomics: Production
  • E62 Fiscal Policy
  • F41 Open Economy Macroeconomics
  • H63 National Debt; Debt Management; Sovereign Debt
There are no comments for this article.
Login to Comment