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Equilibrium Sovereign Default with Endogenous Exchange Rate Depreciation

Author

Listed:
  • Sergey V. Popov

    (Univeristy of Illinois)

  • David G. Wiczer

    (University of Illinois)

Abstract

Sovereign default often affects country’s trade relations. The defaulter’s currency depreciates while trade volume falls drastically. To explain this connection, this study proposes a model to incorporate real depreciation along with sovereign bankruptcy. Defaulters must exchange more of their own goods for imports, which stimulates an adjustment to the equilibrium exchange rate. We demonstrate that a default episode can imply up to a 30% real depreciation. This matches the depreciations observed in crisis events for developing countries. To avoid this, countries are willing to maintain borrowing obligations up to a realistic level of debt.

Suggested Citation

  • Sergey V. Popov & David G. Wiczer, 2010. "Equilibrium Sovereign Default with Endogenous Exchange Rate Depreciation," 2010 Meeting Papers 314, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:314
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    References listed on IDEAS

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    1. David L. Hummels & Georg Schaur, 2013. "Time as a Trade Barrier," American Economic Review, American Economic Association, vol. 103(7), pages 2935-2959, December.
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    3. Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default in "Bad Times" ?," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 352-360, 04-05.
    4. Arteta, Carlos & Hale, Galina, 2008. "Sovereign debt crises and credit to the private sector," Journal of International Economics, Elsevier, vol. 74(1), pages 53-69, January.
    5. V. V Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 533-563.
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    8. Satyajit Chatterjee & Burcu Eyigungor, 2012. "Maturity, Indebtedness, and Default Risk," American Economic Review, American Economic Association, vol. 102(6), pages 2674-2699, October.
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    Cited by:

    1. Gondo, Rocío, 2013. "Default Externalities in Emerging Market Systemic Private Debt Crises," Working Papers 2013-023, Banco Central de Reserva del Perú.

    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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