International Spillovers and Bailouts
∗
Marina Azzimonti
Stony Brook University and NBER
Vincenzo Quadrini
University of Southern California and CEPR
This version: August 2019
Abstract
We study how cross-country macroeconomic spillovers caused by sovereign
default affect equilibrium bailouts. Because of portfolio diversification, the
default of one country causes a macroeconomic contraction in other countries.
This creates a vested-interest to bailout the defaulting country. A novel insight
of the paper is that, although anticipated bailouts lead to higher borrowing,
this may correct for the under-issuance of debt due to the lack of cross-country
policy coordination. As a result, bailouts could be Pareto improving not only
ex-post (after the debt has been issued) but also ex-ante (before the issuance
of the debt).
∗
Previous versions of the paper has circulated under the title “International spillovers and ex-ante
efficient bailouts”. We would like to thank Manuel Amador for discussing the paper and seminar
attendees at Atlanta Fed, Bank of Canada, Claremont McKenna College, NBER IFM Summer Meet-
ing, International Monetary Fund, John Hopkins University, Minnesota Workshop in Macroeconomic
Theory, Penn State University, Philadelphia Fed, Stanford University, SED meetings, Stockman
Conference, University of California San Diego, University of California Santa Barbara, University
of Georgia, University of Houston, University of Maryland, University of Rochester, University of
Wisconsin, Yale University.