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Article
Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt
International Economic Journal (2013)
  • Juan Carlos Hatchondo
  • Leonardo Martinez
Abstract

We study the sovereign debt duration chosen by the government in the context of a standard model of sovereign default. The government balances off increasing the duration of its debt to mitigate rollover risk and lowering duration to mitigate the debt dilution problem. We present two main results. First, when the government decides the debt duration on a sequential basis, sudden stop risk increases the average duration by 1 year. Second, we illustrate the time inconsistency problem in the choice of sovereign debt duration: governments would like to commit to a duration that is 1.7 years shorter than the one they choose when decisions are made sequentially.

Publication Date
2013
Citation Information
Juan Carlos Hatchondo and Leonardo Martinez. "Sudden Stops, Time Inconsistency, and the Duration of Sovereign Debt" International Economic Journal (2013)
Available at: http://works.bepress.com/leonardo_martinez/22/