 A Continuous-Time Model of Sovereign DebtGideon Bornstein Journal of Economic Dynamics and Control, 2020, vol. 118, issue C Abstract: I construct a continuous-time model of strategic default and provide a numerical algorithm that solves it. I compare the results and computation times to standard discrete-time models of sovereign debt. The method proposed here is faster than discrete-time computation methods while obtaining similar quantitative results. The few differences between the models can all be attributed to a painful deleveraging feature. When debt issuance happens at a higher frequency, the sovereign faces higher interest rate spreads along the deleveraging process. So rolling over its debt becomes more costly. This feature leads to a coefficient of variation for interest rate spreads that is higher and closer to the data relative to its discrete-time sovereign debt model counterpart, calibrated to quarterly frequency. I solve three variants of the model. The first includes short-term maturity bonds only and a constant risk-free interest rate. The second allows for stochastic fluctuations in the risk-free rate. Finally, I extend the model to allow for long-term bonds. Keywords: Sovereign debt; Default; Business cycles; Continuous time; Numerical methods (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301317 DOI: 10.1016/j.jedc.2020.103963 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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