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Default Externalities in Emerging Market Systemic Private Debt Crises

  • Gondo, Rocío

    (Banco Central de Reserva del Perú)

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.

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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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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2013-023.

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Date of creation: Dec 2013
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Handle: RePEc:rbp:wpaper:2013-023
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  1. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  2. Javier Bianchi, 2010. "Overborrowing and Systemic Externalities in the Business Cycle," 2010 Meeting Papers 96, Society for Economic Dynamics.
  3. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates and the current account," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  4. Sergey V. Popov & David G. Wiczer, 2010. "Equilibrium Sovereign Default with Endogenous Exchange Rate Depreciation," 2010 Meeting Papers 314, Society for Economic Dynamics.
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  6. Zhang, H.H., 1995. "Endogenous Borrowing Constraints with Incomplete Markets," GSIA Working Papers 1995-25, Carnegie Mellon University, Tepper School of Business.
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  9. Shleifer, Andrei & McLiesh, Caralee & Hart, Oliver & Djankov, Simeon, 2008. "Debt Enforcement Around the World," Scholarly Articles 2961825, Harvard University Department of Economics.
  10. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  11. Jing Zhang & Yun Jung Kim, 2010. "Decentralized Borrowing and Centralized Default," 2010 Meeting Papers 1288, Society for Economic Dynamics.
  12. Karsten Jeske, 2006. "Private International Debt with Risk of Repudiation," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 576-593, June.
  13. Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
  14. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
  15. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 523-561, August.
  16. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, vol. 6(4), pages 459-472, November.
  17. Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
  18. Martín Uribe, 2006. "Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrome," NBER Working Papers 12260, National Bureau of Economic Research, Inc.
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