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Sovereign default: The role of expectations

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  • Ayres, João
  • Navarro, Gaston
  • Nicolini, Juan Pablo
  • Teles, Pedro

Abstract

In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria, similar to the ones found in Calvo (1988). For distributions of output that are commonly used in the literature, the high interest rate equilibria have properties that make them fragile. Once output is drawn from a distribution with both good and bad times, however, it is possible to have robust high interest rate equilibria.

Suggested Citation

  • Ayres, João & Navarro, Gaston & Nicolini, Juan Pablo & Teles, Pedro, 2018. "Sovereign default: The role of expectations," Journal of Economic Theory, Elsevier, vol. 175(C), pages 803-812.
    • Handle: RePEc:eee:jetheo:v:175:y:2018:i:c:p:803-812
    DOI: 10.1016/j.jet.2018.02.006
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    More about this item

    Keywords

    Sovereign default; Multiple equilibria; Good and bad times;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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