Reportgreen2004

Defaultable Debt, Interest Rates and the Current Account

70 citations0/0 files storedNational Bureau of Economic Research

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Economic Theory and Policy

Abstract

World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina's default in 2002.In this paper we develop a quantitative model of debt and default in a small open economy.We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated.That is, emerging markets on average borrow more in good times and at lower interest rates as compared to slumps.Our ability to match these facts within the framework of an otherwise standard business cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets.

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References

1981Debt with Potential Repudiation: Theoretical and Empirical Analysis 2007Emerging Market Business Cycles: The Cycle Is the Trend 1988Sovereign Debt: Is To Forgive To Forget?1991Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models 1993Debt-Constrained Asset Markets 1991The Macroeconomics of Populism in Latin America 2003Debt Intolerance 2002International Business Cycles with Endogenous Incomplete Markets

Cited by

2012International Reserves and Rollover Risk 2013Linkages across Sovereign Debt Markets 2015Gambling for Redemption and Self-Fulfilling Debt Crises 2021Sovereign Debt in the 21st Century 2008Default and the Maturity Structure in Sovereign Bonds

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