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Sovereign default: which shocks matter?

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  • Bernardo Guimaraes

    (Fundacao Getulio Vargas)

Abstract

This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2010.10.002
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 4 (October)
Pages: 553-576

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Handle: RePEc:red:issued:09-166

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Related research

Keywords: Sovereign debt; Default; World interest rates; Output shocks;

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References

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Cited by:
  1. Carolina Achury & Christos Koulovatianos & John Tsoukalas, . "External Sovereign Debt in a Monetary Union: Bailouts and the Role of Corruption," Discussion Papers 11/11, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Nathan Foley‐Fisher & Bernardo Guimaraes, 2013. "U.S. Real Interest Rates and Default Risk in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 45(5), pages 967-975, 08.
  3. Gonçalves, Carlos Eduardo & Guimarães, Bernardo, 2012. "Sovereign default risk and commitment for fiscal adjustment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9163, C.E.P.R. Discussion Papers.

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