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Maturity, indebtedness, and default risk

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  • Satyajit Chatterjee
  • Burcu Eyigungor

Abstract

In this paper, the authors present a new approach to incorporating long-term debt into equilibrium models of unsecured debt and default. They make three sets of contributions. First, the authors advance the theory of sovereign debt begun in Eaton and Gersovitz (1981) by proving the existence of an equilibrium price function with the property that the interest rate on debt is increasing in the amount borrowed. Second, using Argentina as a test case, they show that unlike a one-period debt model, their model of long-term debt is capable of accounting for the average external debt-to-output ratio, average spread on external debt, and the standard deviation of spreads for the 1993-2001 period, without any deterioration in the model's ability to account for Argentina's other cyclical facts. Third, the authors propose a new and very accurate method for solving the model.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-12.

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Date of creation: 2010
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Handle: RePEc:fip:fedpwp:10-12

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Keywords: Debt ; Default (Finance) ; Econometric models;

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  1. Cuadra, Gabriel & Sapriza, Horacio, 2008. "Sovereign default, interest rates and political uncertainty in emerging markets," Journal of International Economics, Elsevier, Elsevier, vol. 76(1), pages 78-88, September.
  2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  3. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper, Federal Reserve Bank of Richmond 08-02, Federal Reserve Bank of Richmond.
  4. Mark Aguiar & Gita Gopinath, 2004. "Defaultable Debt, Interest Rates and the Current Account," NBER Working Papers 10731, National Bureau of Economic Research, Inc.
  5. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Online Appendix to "Quantitative properties of sovereign default models: solution methods"," Technical Appendices, Review of Economic Dynamics 08-133, Review of Economic Dynamics.
  6. Athreya, Kartik B., 2002. "Welfare implications of the Bankruptcy Reform Act of 1999," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(8), pages 1567-1595, November.
  7. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why do emerging economies borrow short term?," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  8. Ananth Ramanarayanan & Cristina Arellano, 2008. "Default and the Maturity Structure in Sovereign Bonds," 2008 Meeting Papers, Society for Economic Dynamics 479, Society for Economic Dynamics.
  9. Cole, Harold L & Kehoe, Timothy J, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(1), pages 91-116, January.
  10. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, Econometric Society, vol. 75(6), pages 1525-1589, November.
  11. Gelos, R. Gaston & Sahay, Ratna & Sandleris, Guido, 2011. "Sovereign borrowing by developing countries: What determines market access?," Journal of International Economics, Elsevier, Elsevier, vol. 83(2), pages 243-254, March.
  12. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  13. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers, Stanford Institute for Economic Policy Research 04-011, Stanford Institute for Economic Policy Research.
  14. David Benjamin, 2008. "Recovery Before Redemption," 2008 Meeting Papers, Society for Economic Dynamics 531, Society for Economic Dynamics.
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