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Default Externalities in Emerging Market Systemic Private Debt Crises

Author

Listed:
  • Gondo, Rocío

    (Banco Central de Reserva del Perú)

Abstract

This paper analyzes how default externalities lead to an excessive incidence of systemic private debt crises. An individual defaulting borrower does not internalize that her default leads to a depreciation in the exchange rate because international lenders will sell any seizable assets and flee the country. The exchange rate depreciation in turn reduces the value of non-tradable collateral and induces other borrowers to default, leading to a chain reaction of defaults. The inefficiency in default spillovers can be corrected by strengthening the enforcement of creditor rights, so that individual agents default less often, reducing the frequency of systemic default.

Suggested Citation

  • Gondo, Rocío, 2013. "Default Externalities in Emerging Market Systemic Private Debt Crises," Working Papers 2013-023, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2013-023
    as

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    File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2013/documento-de-trabajo-23-2013.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial crisis; default; capital ows; pecuniary externalities; creditor rights; real exchange rate;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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