Abstract
Infrequent but turbulent sovereign defaults on domestic creditors were a “forgotten history” in macroeconomics. We propose a Bewley model in which the government chooses debt and default on domestic and foreign creditors by balancing distributional incentives versus the benefits of debt for self-insurance, liquidity, and risk-sharing. A feedback mechanism links debt issuance, the debt distribution, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare and preceded by surging debt and spreads. Debt sells at the risk-free price most often but lack of commitment cuts sustainable debt sharply.
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