IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v186y2026ics0014292126000541.html

Sovereign debt pricing with shifting long-run growth expectations

Author

Listed:
  • Kuang, Pei
  • Shi, Liang

Abstract

The paper presents new evidence of systematic patterns in real-time estimates of long-run output growth rates and, importantly, reveals a negative, nonlinear relationship between these estimates and sovereign debt spreads during the Eurozone debt crisis of the 2010s. To study the implications of these beliefs, we develop a sovereign default model in which agents infer trend growth from aggregate output and from noisy signals about the trend. The model reproduces these empirical patterns in the trend growth estimates and their negative and nonlinear relationship with spreads, unlike a comparable full-information model. Overoptimism about trend growth during booms encourages excessive borrowing, leading to persistently elevated spreads thereafter.

Suggested Citation

  • Kuang, Pei & Shi, Liang, 2026. "Sovereign debt pricing with shifting long-run growth expectations," European Economic Review, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:eecrev:v:186:y:2026:i:c:s0014292126000541
    DOI: 10.1016/j.euroecorev.2026.105310
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014292126000541
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2026.105310?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:186:y:2026:i:c:s0014292126000541. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.