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Learning about Debt Crises

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  • Radek Paluszynski

    (University of Minnesota)

Abstract

The European debt crisis of 2008-2014 was marked with a surge in government bond yields on unprecedented scale among developed countries in modern history. The peak of this crisis occurred with a significant lag following the initial shocks to output, even though governments did not undertake the fiscal adjustments necessary to prevent a further increase in default risk. I show that these observations are at odds with the predictions of existing sovereign debt models and propose a new theory that features disaster risk and incomplete information about the country’s economic outlook. In a model calibrated to Portuguese economy, the delay arises endogenously as a result of the markets’ learning process. I support the theory with a dataset of real-time forecasts (private and public) and show that forecast errors were particularly large at the outset of the Great Recession, in line with the model predictions.

Suggested Citation

  • Radek Paluszynski, 2017. "Learning about Debt Crises," 2017 Meeting Papers 1602, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1602
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    References listed on IDEAS

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    Cited by:

    1. Florent Kanga GBONGUE & Lambert N’Galadjo BAMBA, 2023. "Le modèle hybride de la structure par terme des primes souveraines de crédit et de liquidité dans la zone UEMOA," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 57, pages 101-145.
    2. Silvia Marchesi, 2016. "Life after default? Private vs. official sovereign debt restructurings," Development Working Papers 398, Centro Studi Luca d'Agliano, University of Milano, revised 26 Aug 2016.
    3. R. Anton Braun & Tomoyuki Nakajima, 2018. "Why Prices Don't Respond Sooner to a Prospective Sovereign Debt Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 235-255, July.
    4. Michinao Okachi, 2019. "Sovereign Default Triggered by Inability to Repay Debt," IMES Discussion Paper Series 19-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Marchesi, Silvia & Masi, Tania, 2021. "Life after default. Private and official deals," Journal of International Money and Finance, Elsevier, vol. 113(C).
    6. Giancarlo Corsetti, 2023. "Debt crises, fast and slow Giancarlo," RSCAS Working Papers 2023/15, European University Institute.
    7. Bocola, Luigi & Bornstein, Gideon & Dovis, Alessandro, 2019. "Quantitative sovereign default models and the European debt crisis," Journal of International Economics, Elsevier, vol. 118(C), pages 20-30.
    8. Radoslaw Paluszynski & Georgios Stefanidis, 2023. "Borrowing into debt crises," Quantitative Economics, Econometric Society, vol. 14(1), pages 277-308, January.

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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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