At this Macroeconomics, Trade, and Investment (MTI) seminar on May 5, 2022, Professor Mark Aguiar (Princeton University), following the book “The Economics of Sovereign Debt and Default,” used relatively tractable planning problems to discuss efficiency properties of the sovereign debt market, how these properties fail due to the incentive to dilute legacy bondholders, and how issuing or repurchasing legacy debt may improve efficiency but may not occur in a competitive equilibrium. The framework also allowed discussion of how long-term bonds, while useful in resolving rollover crises, bring their own, novel source of self-fulfilling debt dynamics. Sergio Schmukler (Research Manager, Development Research Group) provided comments.
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