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A simple model of multiple equilibria and default Daniel Gros - CIAO - aei pitt

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The document presents a model of sovereign default that incorporates two types of costs associated with default: a lump-sum cost from being recognized as in default and a variable cost that increases with the losses imposed on creditors. It explores the implications of multiple equilibria, where high interest rates can lead to increased temptation to default, creating a feedback loop. The introduction of uncertainty reduces the likelihood of multiple equilibria. The paper emphasizes the importance of understanding these dynamics in the context of euro area countries that cannot print their own currency.

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What is the difference between single and multiple equilibrium?

Simultaneous equilibrium refers to a situation where multiple reactions occur at the same time in a single system, and all reactions reach equilibrium simultaneously. Multiple equilibrium refers to a situation where a single system can have different equilibrium states under different conditions.

What problem arises in coordination games with multiple equilibria?

Coordination games with multiple equilibria can cause difficulty in determining the best outcome among players, potentially leading to coordination failures. Players might struggle with decision-making due to ambiguity and uncertainty about others strategies.

Can there be multiple equilibrium points?

In more complicated models of strategic interaction it is very common to have more than one equilibrium.

What is a multiple equilibria?

MULTIPLE EQUILIBRIA: Multiple equilibria occur when several different local regions of the same phase space are dynamical attractors. The same system dynamics can lead to more than one stable state depending on the location in phase space of the system, and thus on initial conditions.