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Dynamics of investment, debt, and default

Author Info

Listed author(s):
  • Grey Gordon
  • Pablo Guerrón-Quintana

Abstract

How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign’s ability to meet its obligations, reducing the likelihood of default and the risk premium. This effect, however, is diminishing in the stock of capital because capital also tames the severity of the contraction following default, making autarky more appealing. Access to long-term debt and costly capital adjustment are crucial for matching business cycles. Our quantitative model delivers default episodes that mimic those observed in the data.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-18.

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Date of creation: 2013
Handle: RePEc:fip:fedpwp:13-18
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Keywords: Investments ; Debt ; Default (Finance);

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Find related papers by JEL classification:
  • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
  • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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  1. Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 187-232.
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  7. Pavan, Marina, 2008. "Consumer durables and risky borrowing: The effects of bankruptcy protection," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1441-1456, November.
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  16. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
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  18. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-436, June.
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Cited by:

  1. Park, JungJae, 2011. "Sovereign Default and Capital Accumulation," MPRA Paper 60150, University Library of Munich, Germany, revised Nov 2014.
  2. Yongquan Cao & Grey Gordon, 2016. "A Practical Approach to Testing Calibration Strategies," Caepr Working Papers 2016-004 Classification-C, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  3. Mark Aguiar & Satyajit Chatterjee & Harold Cole & Zachary Stangebye, 2016. "Quantitative Models of Sovereign Debt Crises," NBER Working Papers 22125, National Bureau of Economic Research, Inc.
  4. Kollintzas, Tryphon & Tsoukalas, Konstantinos, 2015. "Bank and Sovereign Risk Interdependence in the Euro Area," CEPR Discussion Papers 10485, C.E.P.R. Discussion Papers.

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