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Sovereign Default and the Decline in Interest Rates

Author

Listed:
  • Max Miller
  • James D. Paron
  • Jessica Wachter

Abstract

Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-Covid suggest that sovereign default risk may have returned.

Suggested Citation

  • Max Miller & James D. Paron & Jessica Wachter, 2025. "Sovereign Default and the Decline in Interest Rates," NBER Working Papers 34021, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34021
    Note: AP EFG
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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