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Persistent gaps and default traps

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Author Info

  • Catão, Luis A.V.
  • Fostel, Ana
  • Kapur, Sandeep

Abstract

We show how vicious circles in countries' credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks. In such an environment, default signals the borrower's vulnerability to adverse shocks and creates a pessimistic growth outlook. This translates into higher interest spreads and debt servicing costs relative to income, raising the cost of future repayments, thereby creating "default traps". We build a long and broad cross-country dataset to show the existence of a history-dependent "default premium" and of significant effects of output persistence on sovereign creditworthiness, consistent with the model's predictions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 89 (2009)
Issue (Month): 2 (July)
Pages: 271-284

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Handle: RePEc:eee:deveco:v:89:y:2009:i:2:p:271-284

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Sovereign Debt Serial default Default premium Emerging market bond spreads Asymmetric information Output persistence;

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References

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Citations

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Cited by:
  1. Juan J. Cruces & Christoph Trebesch, 2011. "Sovereign Defaults: The Price of Haircuts," CESifo Working Paper Series 3604, CESifo Group Munich.
  2. Reinhart, Carmen & Qian, Rong & Rogoff, Kenneth, 2010. "Do countries “graduate” from crises? Some historical perspective," MPRA Paper 24761, University Library of Munich, Germany.
  3. International Monetary Fund, 2012. "Commodity Price Volatility and the Sources of Growth," IMF Working Papers 12/12, International Monetary Fund.
  4. Luis Catão & Gian-Maria Milesi-Ferretti, 2013. "External Liabilities and Crises," IMF Working Papers 13/113, International Monetary Fund.
  5. Aiolfi, Marco & Catão, Luis A.V. & Timmermann, Allan, 2011. "Common factors in Latin America's business cycles," Journal of Development Economics, Elsevier, vol. 95(2), pages 212-228, July.
  6. Ağca, Şenay & Celasun, Oya, 2012. "Sovereign debt and corporate borrowing costs in emerging markets," Journal of International Economics, Elsevier, vol. 88(1), pages 198-208.
  7. Céspedes, Luis Felipe & Velasco, Andrés, 2014. "Was this time different?: Fiscal policy in commodity republics," Journal of Development Economics, Elsevier, vol. 106(C), pages 92-106.
  8. Rong Qian & Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "On Graduation from Default, Inflation and Banking Crises: Elusive or Illusion?," NBER Chapters, in: NBER Macroeconomics Annual 2010, Volume 25, pages 1-36 National Bureau of Economic Research, Inc.
  9. Romain Ranciere & Ana Fostel & Luis Catao, 2011. "Sudden Stops and Sovereign Defaults," 2011 Meeting Papers 1359, Society for Economic Dynamics.
  10. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers 09/29, International Monetary Fund.
  11. Ana Fostel & Graciela Laura Kaminsky, 2007. "Latin America's Access to International Capital Markets: Good Behavior or Global Liquidity?," NBER Working Papers 13194, National Bureau of Economic Research, Inc.
  12. Cruces, Juan J. & Trebesch, Christoph, 2013. "Sovereign defaults: The price of haircuts," Munich Reprints in Economics 20036, University of Munich, Department of Economics.

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