Self-Fulfilling Debt Crises with Long Stagnations

Joao Ayres, Gaston Navarro, Juan Pablo Nicolini and Pedro Teles

Journal of Political Economy, 2025, vol. 133, issue 12, 4050 - 4101

Abstract: We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the southern European crisis of the early 2010s and the Argentine default of 2001. The source of multiplicity is the one proposed by Calvo. Crucial for multiplicity is an output process characterized by long periods of either high growth or stagnation, which we estimate using data for these countries. Our analysis suggests that expectations-driven debt crises are quantitatively relevant but state dependent, as they occur only during periods of stagnation. Expectations and how they respond to policy are the major factors explaining default rates and credit spread differences between Spain and Argentina.

Date: 2025
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