Quantitative Sovereign Default Models and the European Debt Crisis

Luigi Bocola, Gideon Bornstein and Alessandro Dovis

No 24981, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A large literature has developed quantitative versions of the Eaton and Gersovitz (1981) model to analyze default episodes on external debt. In this paper, we study whether the same framework can be applied to the analysis of debt crises in which domestic public debt plays a prominent role. We consider a model where a government can issue debt to both domestic and foreign investors, and we derive conditions under which their sum is the relevant state variable for default incentives. We then apply our framework to the European debt crisis. We show that matching the cyclicality of public debt ---rather than that of external debt--- allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.

JEL-codes: E44 F34 G15 (search for similar items in EconPapers)
Date: 2018-08
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Published as Luigi Bocola & Gideon Bornstein & Alessandro Dovis, 2019. "Quantitative sovereign default models and the European debt crisis," Journal of International Economics, .
Published as Quantitative Sovereign Default Models and the European Debt Crisis , Luigi Bocola, Alessandro Dovis, Gideon Bornstein. in NBER International Seminar on Macroeconomics 2018 , Galí and West. 2019

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Journal Article: Quantitative sovereign default models and the European debt crisis (2019)
Chapter: Quantitative Sovereign Default Models and the European Debt Crisis (2018)
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