Default Risk and Income Fluctuations in Emerging Economies

Cristina Arellano

American Economic Review, 2008, vol. 98, issue 3, 690-712

Abstract: Recent sovereign defaults are accompanied by interest rate spikes and deep recessions. This paper develops a small open economy model to study default risk and its interaction with output and foreign debt. Default probabilities and interest rates depend on incentives for repayment. Default is more likely in recessions because this is when it is more costly for a risk averse borrower to repay noncontingent debt. The model closely matches business cycles in Argentina predicting high volatility of interest rates, higher volatility of consumption relative to output, and negative correlations of output with interest rates and the trade balance.

JEL-codes: E32 E43 F34 O11 O19 (search for similar items in EconPapers)
Date: 2008
Note: DOI: 10.1257/aer.98.3.690
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Citations: View citations in EconPapers (970)

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Working Paper: Default risk and income fluctuations in emerging economies (2008)
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