The Effects of Higher Borrowing Costs: Insights from Sovereign Default Models

Grey Gordon

Richmond Fed Economic Brief, 2023, vol. 23, issue 22

Abstract: According to sovereign default models, debt becoming more expensive for a sovereign entity results in several significant effects. The government deleverages, capital investment falls for a prolonged duration, GDP and labor decline gradually with capital, and consumption can drop sharply. Outcomes are asymmetric, as positive shocks compress spreads slightly, but negative shocks can increase spreads substantially. The current account tends to increase due to reduced government borrowing from international lenders. The real exchange rate depreciates, which boosts net exports, but also tends to manifest empirically as currency depreciation and inflation. Failure to deleverage dampens short-term costs but creates a lasting drag on the economy.

Keywords: Sovereign Debt Default; current account; asymmetry (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-22 Briefing (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedreb:96407

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Richmond Fed Economic Brief from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by Christian Pascasio ().