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Sovereign default: The role of expectations

Author

Listed:
  • Ayres, João
  • Navarro, Gaston
  • Nicolini, Juan Pablo
  • Teles, Pedro

Abstract

In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria, similar to the ones found in Calvo (1988). For distributions of output that are commonly used in the literature, the high interest rate equilibria have properties that make them fragile. Once output is drawn from a distribution with both good and bad times, however, it is possible to have robust high interest rate equilibria.

Suggested Citation

  • Ayres, João & Navarro, Gaston & Nicolini, Juan Pablo & Teles, Pedro, 2018. "Sovereign default: The role of expectations," Journal of Economic Theory, Elsevier, vol. 175(C), pages 803-812.
  • Handle: RePEc:eee:jetheo:v:175:y:2018:i:c:p:803-812
    DOI: 10.1016/j.jet.2018.02.006
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ayres, João & Navarro, Gaston & Nicolini, Juan Pablo & Teles, Pedro, 2018. "Sovereign default: The role of expectations," Journal of Economic Theory, Elsevier, vol. 175(C), pages 803-812.
    2. Morten Ravn & Neele Balke, 2015. "Time-Consistent Fiscal Policy in a Debt Crisis," 2015 Meeting Papers 613, Society for Economic Dynamics.
    3. repec:eee:macchp:v2-1697 is not listed on IDEAS
    4. Alessandro Dovis & Luigi Bocola, 2015. "Indeterminacy in Sovereign Debt Markets: An Empirical Investigation," 2015 Meeting Papers 694, Society for Economic Dynamics.
    5. Jarociński, Marek & Maćkowiak, Bartosz, 2018. "Monetary-fiscal interactions and the euro area's malaise," Journal of International Economics, Elsevier, vol. 112(C), pages 251-266.
    6. Bianchi, Javier & Mondragon, Jorge, 2018. "Monetary Independence and Rollover Crises," Working Papers 755, Federal Reserve Bank of Minneapolis.
    7. Juan Passadore & Juan Xandri, 2019. "Robust Predictions in Dynamic Policy Games," 2019 Meeting Papers 1345, Society for Economic Dynamics.
    8. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2019. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union," European Journal of Political Economy, Elsevier, vol. 57(C), pages 22-33.
    9. Cláudia Braz & João Amador & João Valle e Azevedo, 2019. "The Deepening of the Economic and Monetary Union," Working Papers o201901, Banco de Portugal, Economics and Research Department.
    10. Mark Aguiar & Satyajit Chatterjee & Harold Cole & Zachary Stangebye, 2017. "Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal," NBER Working Papers 23312, National Bureau of Economic Research, Inc.
    11. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, Elsevier.
    12. Mark A. Aguiar & Manuel Amador, 2018. "Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models," NBER Working Papers 24683, National Bureau of Economic Research, Inc.
    13. Ayres, Joao Luiz & Navarro, Gaston & Nicolini, Juan Pablo & Teles, Pedro, 2019. "Self-Fulfilling Debt Crises with Long Stagnations," Working Papers 757, Federal Reserve Bank of Minneapolis.
    14. Nicolini, Juan Pablo, 2016. "Self-fulfilling Prophecies in Sovereign Debt Markets," Economic Policy Paper 16-8, Federal Reserve Bank of Minneapolis.
    15. repec:eee:jimfin:v:79:y:2017:i:c:p:174-188 is not listed on IDEAS
    16. Dominik Thaler, 2018. "Sovereign default, domestic banks and exclusion from international capital markets," Working Papers 1824, Banco de España;Working Papers Homepage.
    17. repec:eee:inecon:v:110:y:2018:i:c:p:119-134 is not listed on IDEAS
    18. Sergio de Ferra, 2017. "External Imbalances, Gross Capital Flows and Sovereign Debt Crises," 2017 Meeting Papers 726, Society for Economic Dynamics.

    More about this item

    Keywords

    Sovereign default; Multiple equilibria; Good and bad times;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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