Creator: Kehoe, Patrick J. and Perri, Fabrizio Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 621 Abstract:
Previous literature has shown that the study and characterization of constrained efficient allocations in economies with limited enforcement is useful to understand the limited risk sharing observed in many contexts, in particular between sovereign countries. In this paper we show that these constrained efficient allocations arise as equilibria in an economy in which private agents behave competitively, taking as given a set of taxes. We then show that these taxes, which end up limiting risk sharing, arise as an equilibrium of a dynamic game between governments. Our decentralization is different from the existing ones proposed in the literature. We find it intuitively appealing and we think it goes farther than the existing literature in endogenizing the primitive forces that lead to a lack of risk sharing in equilibrium.
Keyword: Sustainable equilibrium, Decentralization, Incomplete markets, Default, Enforcement constraints, Sovereign debt, and Risk-sharing Subject (JEL): E44 - Financial Markets and the Macroeconomy, D50 - General Equilibrium and Disequilibrium: General, E32 - Business Fluctuations; Cycles, F34 - International Lending and Debt Problems, E21 - Macroeconomics: Consumption; Saving; Wealth, and F30 - International Finance: General
Creator: Cole, Harold Linh, 1957- and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 534 Keyword: Loans and Debt Subject (JEL): F34 - International Lending and Debt Problems and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination