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Sovereign defaults, external debt and real exchange rate dynamics

  • Asonuma, Tamon

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis, using the case of Argentina�s default in 2001, replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign�s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 55133.

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Date of creation: 23 Mar 2014
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Handle: RePEc:pra:mprapa:55133
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  1. Devereux, Michael B. & Sutherland, Alan, 2009. "A portfolio model of capital flows to emerging markets," Journal of Development Economics, Elsevier, vol. 89(2), pages 181-193, July.
  2. Emanuel Kohlscheen, 2010. "Sovereign risk: constitutions rule," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 62-85, January.
  3. Arellano, Cristina & Heathcote, Jonathan, 2007. "Dollarization and Financial Integration," CEPR Discussion Papers 6116, C.E.P.R. Discussion Papers.
  4. Eric Van Wincoop & Cedric Tille, 2007. "International Capital Flows," NBER Working Papers 12856, National Bureau of Economic Research, Inc.
  5. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers 1122, Society for Economic Dynamics.
  6. Asonuma, Tamon, 2012. "Serial default and debt renegotiation," MPRA Paper 55139, University Library of Munich, Germany.
  7. Benigno, Gianluca & Thoenissen, Christoph, 2008. "Consumption and real exchange rates with incomplete markets and non-traded goods," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 926-948, October.
  8. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
  9. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
  10. Sandra Lizarazo, 2009. "Default Risk and Risk Averse International Investors," Working Papers 0907, Centro de Investigacion Economica, ITAM.
  11. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2001. "A Corporate Balance-Sheet Approach to Currency Crises," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 01.14, Université de Lausanne, Faculté des HEC, DEEP.
  12. Enrique G. Mendoza & Vivian Z. Yue, 2012. "A General Equilibrium Model of Sovereign Default and Business Cycles," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 889-946.
  13. 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.
  14. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 7.
  15. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
  16. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates, and the current account," Working Papers 04-5, Federal Reserve Bank of Boston.
  17. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  18. repec:oup:restud:v:48:y:1981:i:2:p:289-309 is not listed on IDEAS
  19. Bussière, Matthieu & Fratzscher, Marcel & Koeniger, Winfried, 2004. "Currency mismatch, uncertainty and debt maturity structure," Working Paper Series 0409, European Central Bank.
  20. Winfried Koeniger & Matthieu Bussiere & Marcel Fratzscher, 2004. "Currency Mismatch, Uncertainty and Debt Structure," Econometric Society 2004 North American Summer Meetings 181, Econometric Society.
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