Sovereign default and capital accumulation

JungJae Park

Journal of International Economics, 2017, vol. 106, issue C, 119-133

Abstract: This paper introduces endogenous capital accumulation into an otherwise standard quantitative sovereign default model à la Eaton and Gersovitz (1981). We find that conditional on a level of debt, default incentives are U-shaped in the capital stock: the economy with too small or too large amounts of capital is likely to default. Even without using an ad-hoc output cost of default, the calibrated model generally well matches business cycle facts of emerging economies and generates defaults in “good” and “bad” times, with a frequency of 25.5% and 74.5%, respectively, consistent with Tomz and Wright (2007)’s empirical findings. Simulation results show that the economy defaults in good times when it has “overinvested” in capital during booms before default.

JEL-codes: E32 E44 F32 F34 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:106:y:2017:i:c:p:119-133

DOI: 10.1016/j.jinteco.2017.02.004

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