Igor Carreira

Working Papers

Default Risk and the Insurance Trade-offs: Bailouts or International Reserves? — Job Market Paper (Frequently updated)

Abstract: International reserve accumulation (self-insurance) and bailouts from International Financial Institutions (external insurance) are key instruments that countries use to manage sovereign debt distress. Policymakers have long argued that stringent IMF conditionality has encouraged greater self-insurance over recent decades, despite a lack of direct evidence. To investigate this relationship, I develop a quantitative sovereign default model featuring long-term debt, reserve accumulation, and a conditional bailout facility. The model yields a novel result: the relationship between conditionality stringency and long-run reserve accumulation is non-monotonic. Moderate conditionality increases reserves by shifting reliance from external to self-insurance. Very strict conditionality, on the other hand, raises default risk and makes debt-financed reserve accumulation more costly, lowering reserves. Empirical evidence reveals a nonlinear association between conditionality and reserve accumulation, consistent with the model's prediction. Welfare analysis indicates that stricter bailout programs lead to lower overall welfare, although they deliver long-run gains by inducing safer portfolios—highlighting the importance of transition costs.

Publications

The Deforestation Effects of Trade and Agricultural Productivity in Brazil, with Francisco Costa and João Paulo Pessoa

Journal of Development Economics, 2024  [Coverage: LSE Business Review, VoxLACEA] 

Work in progress

When Should We Help a Trading Partner? Bilateral Bailouts and Sovereign Default