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Quantitative Models of Sovereign Debt Crises

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  • Mark Aguiar
  • Satyajit Chatterjee
  • Harold Cole
  • Zachary Stangebye

Abstract

This chapter is on quantitative models of sovereign debt crises in emerging economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multi-period debt, (v) a default penalty that includes both a reputation loss and a physical output loss and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:22125
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    Cited by:

    1. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2012. "International Reserves and Rollover Risk," NBER Working Papers 18628, National Bureau of Economic Research, Inc.
    2. Zuzana Mucka & Ludovit Odor, 2017. "Sovereign default risk and debt limits: Case of Slovakia," Working Papers Working Paper No. 1/2017, Council for Budget Responsibility.
    3. Enrique Mendoza, 2017. "Optimal Domestic (and External) Sovereign Default," 2017 Meeting Papers 279, Society for Economic Dynamics.
    4. Morten Ravn & Neele Balke, 2015. "Time-Consistent Fiscal Policy in a Debt Crisis," 2015 Meeting Papers 613, Society for Economic Dynamics.
    5. Guillermo Ordonez & Daniel Neuhann & Harold Cole, 2014. "Debt Crises: For Whom the Bell Tolls," 2014 Meeting Papers 1245, Society for Economic Dynamics.
    6. Chatterjee, Satyajit & Eyigungor, Burcu, 2017. "Endogenous Political Turnover and Fluctuations in Sovereign Default Risk," Working Papers 17-1, Federal Reserve Bank of Philadelphia.
    7. Paula Margaretic & Sebastián Becerra, 2017. "Dispersed Information and Sovereign Risk Premia," Working Papers Central Bank of Chile 808, Central Bank of Chile.
    8. Francisco Roch & Harald Uhlig, 2016. "The Dynamics of Sovereign Debt Crises and Bailouts," IMF Working Papers 16/136, International Monetary Fund.
    9. Pablo D'Erasmo & Enrique G. Mendoza, 2016. "Optimal Domestic (and External) Sovereign Default," NBER Working Papers 22509, National Bureau of Economic Research, Inc.
    10. Laura Alfaro, 2016. "Fiscal Rules and Sovereign Default," 2016 Meeting Papers 209, Society for Economic Dynamics.
    11. Alessandro Dovis & Luigi Bocola, 2016. "Self_fulfilling Debt Crises: A Quantitative Analysis," 2016 Meeting Papers 1218, Society for Economic Dynamics.
    12. Di Casola, Paola & Sichlimiris, Spyridon, 2017. "Domestic and External Sovereign Debt," Working Paper Series 345, Sveriges Riksbank (Central Bank of Sweden).
    13. Mark Aguiar & Satyajit Chatterjee & Harold Cole & Zachary Stangebye, 2017. "Self-Fulfilling Debt Crises, Revisited: The Art of the Desperate Deal," NBER Working Papers 23312, National Bureau of Economic Research, Inc.
    14. Takefumi Yamazaki, 2018. "Financial friction sources in emerging economies: Structural estimation of sovereign default models," Discussion papers ron303, Policy Research Institute, Ministry of Finance Japan.
    15. Ricardo Sabbadini, 2017. "Overcoming the Original Sin: Gains from Local Currency External Debt," Working Papers, Department of Economics 2017_27, University of São Paulo (FEA-USP).

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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