Creditor discrimination and crowding-out effects
In Broner, Erce, Martin and Ventura (2014), we propose a theory to interpret these events. The idea rests on three key assumptions:
- Governments sometimes discriminate towards domestic creditors;
- Public debts trade in secondary markets; and
- Financial frictions limit private borrowing.
Inside our model, creditor discrimination is introduced as an increased possibility of default on foreign than on domestic creditors. Because of this, when the likelihood of default increases, debt becomes relatively more appealing to domestic residents. But discrimination could possibly be broadly interpreted to add various regulations and moral suasion that raise the incentives of domestic finance institutions to get their government’s debt in turbulent times. Secondary markets make sure that the debt is assigned to whoever values it most, i.e. domestic and foreign creditors can’t be segmented.