Default and the maturity structure in sovereign bonds
Abstract
This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. To account for this pattern, we build a dynamic model of international borrowing with endogenous default and multiple maturities of debt. Short-term debt can deliver higher immediate consumption than long-term debt; large long-term loans are not available because the borrower cannot commit to save in the near future towards repayment in the far future. However, issuing long-term debt can insure against the need to roll-over short-term debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 410.
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Date of creation: 2008
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Handle: RePEc:fip:fedmsr:410
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Related research
Keywords: Bonds ; Debt ; Default (Finance);Other versions of this item:
- Cristina Arellano & Ananth Ramanarayanan, 2008. "Default and the maturity structure in sovereign bonds," Globalization and Monetary Policy Institute Working Paper 19, Federal Reserve Bank of Dallas.
- NEP-ALL-2008-09-05 (All new papers)
- NEP-DGE-2008-09-05 (Dynamic General Equilibrium)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Niepelt, Dirk, 2008.
"Debt Maturity without Commitment,"
CEPR Discussion Papers
7093, C.E.P.R. Discussion Papers.
- Dirk Niepelt, 2008. "Debt Maturity without Commitment," Working Papers 08.05, Swiss National Bank, Study Center Gerzensee.
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- Satyajit Chatterjee & Burcu Eyigungor, 2009. "Maturity, Indebtedness, and Default Risk," TÃSÃAD-Koç University Economic Research Forum Working Papers 0901, TUSIAD-Koc University Economic Research Forum.
- Satyajit Chatterjee & Burcu Eyigungor, 2009. "Maturity, indebtedness, and default risk," Working Papers 09-2, Federal Reserve Bank of Philadelphia.
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