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External and Public Debt Crises

Staff Report 515 | Published July 7, 2015

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Cristina Arellano Assistant Director, Policy and Monetary Advisor
Andrew Atkeson Consultant
Mark L. J. Wright Senior Vice President & Director of Research (former)
External and Public Debt Crises


The recent debt crises in Europe and the U.S. states feature similar sharp increases in spreads on government debt but also show important differences. In Europe, the crisis occurred at high government indebtedness levels and had spillovers to the private sector. In the United States, state government indebtedness was low, and the crisis had no spillovers to the private sector. We show theoretically and empirically that these different debt experiences result from the interplay between differences in the ability of governments to interfere in private external debt contracts and differences in the flexibility of state fiscal institutions.

Published in: _NBER Macroeconomics Annual 2015_ (Vol. 30, 2016, pp. 191-244)