Internal debt

Debt-to-GDP ratio

Macroeconomics

Debt

Commit

Economics

Debt levels and flows

Government debt

Computer science

External debt

Fiscal policy

Monetary economics

Database

American Economic Review

We study slow moving debt crises: self-fulfilling equilibria in which high interest rates, due to the fear of a future default, lead to a gradual but faster accumulation of debt, ultimately validating investors’ fear. We show that slow moving crises arise in a variety of settings, both when fiscal policy follows a given rule and when it is chosen by an optimizing government. A key assumption, in all these settings, is that the borrowing government cannot commit to issue a fixed amount of bonds in a given period. We discuss how multiplicity is avoided for low debt levels, for sufficiently responsive fiscal policy rules, and for long enough debt maturities. When the equilibrium is unique, debt dynamics are characterized by a tipping point, below which debt falls and stabilizes and above which debt and default rates grow. (JEL E43, E62, H50, H63)

Slow Moving Debt Crises