Sovereign Risk in International Bond Markets and Nonconvergence
AbstractThe paper analyzes the consequences of joining markets of government discount bonds between identical economies when, in each country, there exists a positive probability of the government to default. In autarky such economies of overlapping generations of consumers with capital accumulation converge to a unique positive steady state under certain conditions. When two identical economies of this type open their markets for bonds to the consumers of the other country, diversification in portfolio demand by consumers leads to the existence of a world equilibrium with a uniform bond price in every period. Under such circumstances a symmetric stationary world equilibrium with lower risk per country exists, supported by the same level of capital and income as under autarky. However, due to the interaction of dynamic spill over effects between the bond market and the domestic markets for capital investment, the symmetric steady state may become unstable and stable asymmetric steady states appear, implying symmetry breaking in the sense of Matsuyama (2004). The paper identifies a set of assumptions on consumer and production characteristics together with a range of values of the government’s default parameters, such that instability occurs and asymmetric steady states become locally stable.
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Bibliographic InfoPaper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c014_034.
Length: 19 pages
Date of creation: Jun 2009
Date of revision:
capital accumulation; sovereign risk; international bond markets; non convergence; symmetry-breaking;
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- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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