| This dissertation consists of four essays. Several papers argue that debt crises can be the result of self-fulfilling expectations that no one will lend to a country, which lead to a default, rationalizing the decision not to lend. The first essay shows the coordination failure among contemporary investors is eliminated if the borrowing country allows them to promise to lend only if enough other investors do so as well. A coordination failure where investors do not lend because they expect future investors not to is eliminated if the country issues state-contingent securities that force it to pay down its debt over a long but finite horizon. This suggests runs on the debt of a single borrower (such as the government) can be eliminated, and that self-fulfilling features are more plausible when articulated in a context in which externalities among many decentralized borrowers allow for economy-wide debt runs to occur.; The second essay addresses the question of whether the government can intermediate private lending and use the mechanisms from the first essay to prevent economy-wide coordination failures from occurring. Even if the intermediation has no net effect on the government's inter-temporal budget constraint, it can still compromise its willingness to repay. Since the government's future claims cannot be collateralized, the increase in gross liabilities following the intermediation may not be sustainable even if it implies no change in net liabilities.; The third essay analyzes the implications of denominating foreign debt in a tradable or in a nontradable good, analogous foreign and local currency debt instruments respectively. If there are large deviations from strict creditor seniority enforcement, a nontradable denominated debt holder's claim on a borrower's bankrupt firm can be expropriated through additional borrowing denominated in the tradable good. This dilution mechanism is an inefficient expropriation technology, whose cost is borne by the borrower in equilibrium. That discourages the use of nontradable denominated instruments, even though they can improve international risk sharing and help prevent financial crises.; The fourth essay (with Ricardo Hausmann) explains liability dollarization through the interplay between individual borrower's choices for liability denomination and the resulting optimal monetary policy. |
