Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises

Working Paper no. 136
By Prasanna Gai, Simon Hayes and Hyun Song Shin

Recent debate on the reform of the international financial architecture has highlighted the potentially important role of the official sector in crisis management. We examine how such public intervention in sovereign debt crises affects efficiency, ex ante and ex post. Our results shed light on the scale of capital inflows in such a regime, and we establish conditions under which this leads to an improvement in debtor country welfare. The efficacy of measures such as officially sanctioned stays on creditor litigation depend critically on the quality of public sector surveillance and the size of the costs of sovereign debt crises.

Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises