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Pauline Gandré
''Domestic creditors as last lenders in debt crises: a simple model with multiple equilibria''
( 2015, Vol. 35 No.4 )
It is widely acknowledged that the ratios of public debt over GDP reached historically high levels in the Euro area during the recent sovereign debt crisis. More unnoticed however is the simultaneous increase in the share of government debt held by residents that has started in late 2008 in most fragile economies of the area. This paper develops a simple theoretical framework, in which multiple equilibria arise, to explain why exogenous increases in the debt level may cause this share to increase, due to distinct expected returns on domestic sovereign debt for domestic and foreign creditors in times of turmoil.
Keywords: Debt crises, Domestic creditors, Multiple equilibria
JEL: F3 - International Finance: General
E4 - Money and Interest Rates: General
Manuscript Received : Oct 17 2015 Manuscript Accepted : Dec 26 2015

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