A Brazilian Debt-Crisis Model
We develop a stylised model of multiple equilibria, with country risk spreads at the focus of the analysis. Fears that the country default on its debt triggers a reversal in the direction of inflows of international financial capital raise interest-rate spreads and thus the cost of servicing the public debt. The analytical framework is standard: creditors observe the output of borrowing only at a cost.
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- Townsend, Robert M., 1979.
"Optimal contracts and competitive markets with costly state verification,"
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