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Sovereign default: which shocks matter?

  • Bernardo Guimaraes

    (Fundacao Getulio Vargas)

This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2010.10.002
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 4 (October)
Pages: 553-576

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Handle: RePEc:red:issued:09-166
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