"Competitive runs on Government debt"
In this paper, published in the International Review of Economics & Finance, Michele Moretto and Bruno Maria Parigi from the Department of Economics and Management of the University of Padua, examine the effects of restricting government bond redemptions.
In an economy reliant on these bonds to fund the public sector, two actor groups emerge: Investors and Depositors. When negative economic shocks occur, both groups gradually sell bonds until a 'floor' is reached, beyond which the government no longer redeems bonds. This can trigger a competitive run as Investors and Depositors race to sell their bonds. The study explores the interplay of these actors' decisions, the influence of uncertainty, and which group exits first. It also questions whether economies with financial intermediaries are more resilient in such scenarios.
Read the full paper here