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The Sovereign Default Puzzle: Modelling Issues and Lessons for Europe

  • Cohen, Daniel
  • Villemot, Sébastien

Why do countries default? This seemingly simple question has yet to be adequately answered in the literature. Indeed, prevailing modelling strategies compel the to choose between two unappealing model features: depending on the cost of default selected by the modeler, either the debt ratios are too high and the probability of default is too low or the opposite is true. In view of the historical evidence that countries always default after a crisis, we propose a novel approach to the theory of debt default and develop a model that matches the key stylized facts regarding sovereign risk.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8971.

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Date of creation: May 2012
Date of revision:
Handle: RePEc:cpr:ceprdp:8971
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  1. Vivian Z. Yue, 2005. "Sovereign Default and Debt Renegotiation," 2005 Meeting Papers 138, Society for Economic Dynamics.
  2. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods matter," Working Paper 10-04, Federal Reserve Bank of Richmond.
  3. Arteta, Carlos & Hale, Galina, 2008. "Sovereign debt crises and credit to the private sector," Journal of International Economics, Elsevier, vol. 74(1), pages 53-69, January.
  4. Altug, Sumru G. & Bildirici, Melike, 2010. "Business Cycles around the Globe: A Regime-switching Approach," CEPR Discussion Papers 7968, C.E.P.R. Discussion Papers.
  5. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
  6. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates and the current account," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  7. Satyajit Chatterjee & Burcu Eyigungor, 2010. "Maturity, indebtedness, and default risk," Working Papers 10-12, Federal Reserve Bank of Philadelphia.
  8. Ugo Panizza & Eduardo Levy Yeyati, 2006. "The Elusive Costs of Sovereign Defaults," IDB Publications (Working Papers) 6713, Inter-American Development Bank.
  9. Cohen, Daniel & Villemot, Sébastien, 2011. "Endogenous debt crises," CEPR Discussion Papers 8270, C.E.P.R. Discussion Papers.
  10. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  11. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper 08-02, Federal Reserve Bank of Richmond.
  12. David Benjamin, 2008. "Recovery Before Redemption," 2008 Meeting Papers 531, Society for Economic Dynamics.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates
    [This Time Is Different: Eight Centuries of Financial Folly]
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  14. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
  15. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
  16. David Benjamin & Mark L. J. Wright, 2009. "Recovery Before Redemption: A Theory Of Delays In Sovereign Debt Renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  17. Daniel Cohen & Jeffrey Sachs, 1985. "Growth and External Debt Under Risk of Debt Repudiation," NBER Working Papers 1703, National Bureau of Economic Research, Inc.
  18. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  19. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Quantitative properties of sovereign default models: solution methods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 919-933, October.
  20. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  21. repec:oup:restud:v:48:y:1981:i:2:p:289-309 is not listed on IDEAS
  22. World Bank, 2004. "World Development Indicators 2004," World Bank Publications, The World Bank, number 13890.
  23. Gabriel Cuadra & Horacio Sapriza, 2006. "Sovereign Default, Interest Rates and Political Uncertainty in Emerging Markets," Working Papers 2006-02, Banco de México.
  24. Fabian Fink & Almuth Scholl, 2011. "A Quantitative Model of Sovereign Debt, Bailouts and Conditionality," Working Paper Series of the Department of Economics, University of Konstanz 2011-46, Department of Economics, University of Konstanz.
  25. Federico Sturzenegger & Jeromin Zettelmeyer, 2007. "Debt Defaults and Lessons from a Decade of Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262195534, June.
  26. Goodwin, Thomas H, 1993. "Business-Cycle Analysis with a Markov-Switching Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 331-39, July.
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