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Abstract(s)
This article presents a model in which haircuts on public debt may occur.
My focus relies on the explanation and numerical exploration of multiple
equilibria. Calvo (1988) first found multiple equilibrium interest rates due
to investors’ self-fulfilling expectations of a partial default in a model with
exogenous debt. I use Calvo’s (1988) setting to study the impact of endogenizing
debt on multiplicity. This is a relevant exercise as in this setting
the government has the ability to choose the optimal level of debt. More
than that, if it behaves as a large agent it can influence the interest rate it
will face. In particular, I find that if the interest rate schedule is presented
as in Arellano (2008), depending on debt at maturity, uniqueness can be
achieved by a government behaving as a large agent. However, investors
can also coordinate on offering a schedule depending on the initial level of
debt, as implicitly defined in Calvo (1988). In this case there is more than
one equilibrium, provided that public expenditure in the first period is not
extremely high.