Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models

Mark Aguiar, Manuel Amador

Research output: Contribution to journalArticlepeer-review

14 Scopus citations


We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies.

Original languageEnglish (US)
Pages (from-to)2783-2818
Number of pages36
JournalAmerican Economic Review
Issue number9
StatePublished - Sep 2020

Bibliographical note

Funding Information:
*Aguiar: Department of Economics, Princeton University (email:; Amador: Research Department, Federal Reserve Bank of Minneapolis, and Department of Economics, University of Minnesota (email: Mikhail Golosov was the coeditor for this article. We thank seminar participants at multiple places. We also benefited from discussions with Fabrice Tourre. We are very thankful to Stelios Fourakis, who provided us with excellent research assistance. Manuel Amador thanks the National Science Foundation for support (award 0952816). The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Publisher Copyright:
© 2020 American Economic Association. All rights reserved.


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