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Sovereign Debt Restructurings

Sovereign debt crises generally involve debt restructurings characterized by a mix of face-value haircuts and debt maturity extensions. We present new evidence on maturity extensions in distressed restructurings and develop a new quantitative model of endogenous sovereign debt restructuring that captures important stylized facts of debt over the business cycle and during restructuring episodes, helping to identify key ingredients that generate maturity extensions. We also find that policy interventions implementing minimum haircuts and equalizing losses across holders of different maturities are welfare enhancing as they facilitate maturity extensions in restructurings. Methodologically, the use of dynamic discrete choice solution methods allows for smoother decision rules on default and debt portfolio choices, rendering the problem tractable.

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