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

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. ∗Andrew Haldane, Adrian Penalver, Paul Tucker and an anonymous referee for helpful comments and encouragement. We thank seminar participants at the International Finance Summer Camp in Santiago, the London School of Economics, the University of Newcastle upon Tyne, the Bank of England and the Bank of Japan for comments on an earlier version of the paper. The usual caveat applies. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of England. †email: [email protected]