Learning about Debt Crises

Paluszynski, Radek

Learning about Debt Crises

American Economic Journal: Macroeconomics, 2023, vol. 15, issue 1, 106-34

Abstract: The European debt crisis presents a challenge to our understanding of the relationship between government bond yields and economic fundamentals. I argue that information frictions are an important missing element and support that claim with evidence on the evolution of GDP forecast errors after 2008. I build a quantitative model of sovereign default where output features rare disasters and agents learn about their realizations. Debt crises coincide with economic depressions and develop gradually while markets update their expectations about future income. Calibrated to the Portuguese economy, the model replicates the comovement of bond spreads and output before and after 2008.

JEL-codes: E23 E27 E32 E43 F34 H63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Working Paper: Learning about Debt Crises (2017)
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DOI: 10.1257/mac.20190189

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