Optimal costs of sovereign default
I apply a standard model of sovereign debt in order to identify the optimal costs of default from the ex-ante point of view of the borrower. I depart from the literature by distinguishing events of strong economic crises from standard business cycles. Crisis events seem to be appropriate moments in which the option to default might be welfare improving by providing state contingency in the debt contract. The quantitative analysis shows that the costs of default should be limited, leaving default as an option, but at much higher levels than the ones consistent with the observed debt-output and default ratios of emerging economies. The results in this paper have implication on the evolution of sovereign debt workout procedures and the potential demand for new debt instruments.
When requesting a correction, please mention this item's handle: RePEc:bcb:wpaper:236. 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: (Francisco Marcos Rodrigues Figueiredo)
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.