Advanced Search
MyIDEAS: Login

News and sovereign default risk in small open economies

Contents:

Author Info

  • Ricardo Nunes

    (Federal Reserve Board)

  • Horacio Sapriza

    (Federal Reserve Board)

  • Bora Durdu

    (Federal Reserve Board)

Abstract

This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks affect equilibrium outcomes because they contain information about the future ability of the government to repay its debt. First, in the model with news shocks not all defaults occur in bad times, bringing the model closer to the data. Second, the news shocks help account for key differences between emerging markets and developed economies: a higher precision of news about future fundamentals lowers the uncertainty that agents face and partially completes financial markets. As the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt more in line with the characteristics of developed economies. Finally, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economicdynamics.org/meetpapers/2011/paper_1355.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1355.

as in new window
Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:1355

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Correia, I. & Rabelo, S. & Naves, J.C., 1994. "Business Cycles in a Small Open Economy," RCER Working Papers 382, University of Rochester - Center for Economic Research (RCER).
  2. Andrew K. Rose, 2002. "One Reason Countries Pay Their Debts: Renegotiation and International Trade," Working Papers 042002, Hong Kong Institute for Monetary Research.
  3. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  4. Pablo A. Guerron-Quintana & Martin Uribe & Juan Rubio-Ramirez & Jesús Fernández-Villaverde, 2009. "Risk Matters: The Real E¤ects of Volatility Shocks," 2009 Meeting Papers 237, Society for Economic Dynamics.
  5. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  6. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
  7. Durdu, Ceyhun Bora & Mendoza, Enrique G. & Terrones, Marco E., 2009. "Precautionary demand for foreign assets in Sudden Stop economies: An assessment of the New Mercantilism," Journal of Development Economics, Elsevier, vol. 89(2), pages 194-209, July.
  8. Stijn Claessens, 2006. "Access to Financial Services: A Review of the Issues and Public Policy Objectives," World Bank Research Observer, World Bank Group, vol. 21(2), pages 207-240.
  9. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2008. "Heterogeneous borrowers in quantitative models of sovereign default," Working Paper 07-01, Federal Reserve Bank of Richmond.
  10. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," NBER Working Papers 10015, National Bureau of Economic Research, Inc.
    • Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," CEMA Working Papers 594, China Economics and Management Academy, Central University of Finance and Economics.
  11. Rustichini, A., 1996. "Dynamic Programming Solution of Incentive Constrained Problems," Discussion Paper 1996-97, Tilburg University, Center for Economic Research.
  12. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
  13. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
  14. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default in "Bad Times" ?," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 352-360, 04-05.
  15. Ananth Ramanarayanan & Cristina Arellano, 2008. "Default and the Maturity Structure in Sovereign Bonds," 2008 Meeting Papers 479, Society for Economic Dynamics.
  16. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers 014, Universidad Torcuato Di Tella.
  17. Martin Uribe & Vivian Yue, 2004. "Country spreads and emerging countries: who drives whom?," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  18. Enrique G. Mandoza & Vivian Z. Yue, 2008. "A solution to the default risk-business cycle disconnect," International Finance Discussion Papers 924, Board of Governors of the Federal Reserve System (U.S.).
  19. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates and the current account," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  20. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
  21. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  22. Marcel Peter, 2002. "Estimating Default Probabilities of Emerging Market Sovereigns: A New Look at a Not-So-New Literature," IHEID Working Papers 06-2002, Economics Section, The Graduate Institute of International Studies.
  23. Sandra Lizarazo & Jose Maria Da-Rocha, 2009. "Money, Credit and Default," Working Papers 0908, Centro de Investigacion Economica, ITAM.
  24. Vivian Z. Yue & Enrique G. Mendoza, 2009. "A Solution to the Default Risk-Business Cycle Disconnect," 2009 Meeting Papers 76, Society for Economic Dynamics.
  25. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  26. Carlos Arteta & Galina Hale, 2006. "Sovereign debt crises and credit to the private sector," Working Paper Series 2006-21, Federal Reserve Bank of San Francisco.
  27. Emine Boz & Christian Daude & Ceyhun Bora Durdu, 2008. "Emerging market business cycles revisited: learning about the trend," International Finance Discussion Papers 927, Board of Governors of the Federal Reserve System (U.S.).
  28. Jaimovich, Nir & Rebelo, Sérgio, 2007. "News and Business Cycles in Open Economies," CEPR Discussion Papers 6520, C.E.P.R. Discussion Papers.
  29. Cuadra, Gabriel & Sapriza, Horacio, 2008. "Sovereign default, interest rates and political uncertainty in emerging markets," Journal of International Economics, Elsevier, vol. 76(1), pages 78-88, September.
  30. Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," CEPR Discussion Papers 4628, C.E.P.R. Discussion Papers.
  31. Sandra Lizarazo, 2009. "Default Risk and Risk Averse International Investors," Working Papers 0907, Centro de Investigacion Economica, ITAM.
  32. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Leonardo Martinez & Cesar Sosa Padilla & Juan Hatchondo, 2012. "Debt dilution and sovereign default risk," 2012 Meeting Papers 974, Society for Economic Dynamics.
  2. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," CAMA Working Papers 2013-16, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Leonardo Martinez & Juan Hatchondo & Javier Bianchi, 2012. "Sovereign defaults and optimal reserves management," 2012 Meeting Papers 1125, Society for Economic Dynamics.
  4. Christopher M. Gunn & Alok Johri, 2013. "Fear of Sovereign Default, Banks, and Expectations-driven Business Cycles," Department of Economics Working Papers 2013-08, McMaster University.
  5. Fabian Fink & Almuth Scholl, 2011. "A Quantitative Model of Sovereign Debt, Bailouts and Conditionality," Working Paper Series of the Department of Economics, University of Konstanz 2011-46, Department of Economics, University of Konstanz.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed011:1355. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.