Endogenous Debt Crises

Daniel Cohen (1, 2) , Sébastien Villemot (1, 2)

1 PSE - Paris-Jourdan Sciences Economiques
2 PSE - Paris School of Economics

We distinguish two types of debt crises: those that are the outcome of exogenous shocks (to productivity growth for instance) and those that are endogenously created, either by self-fulfilling panic in financial markets or by the reckless behavior of “Panglossian” borrowers. After Krugman, we characterize as “Panglossian” those borrowers who only focus on their best growth prospects, anticipating to default on their debt if hit by an adverse shock, rationally ignoring the risk of default. We apply these categories empirically to the data. We show that, taken together, endogenous crises are powerful explanations of debt crises, more important for instance than the sheer effect of growth on a country's solvency.

Mots clés: Sovereign debt; Self-fulfilling crises

Domaines: Economies et finances

Daniel Cohen, Sébastien Villemot. Endogenous Debt Crises. Journal of International Money and Finance, 2015, 51, pp.337 - 369. ⟨10.1016/j.jimonfin.2014.11.005⟩. ⟨halshs-01204762⟩