Sovereign default: which shocks matter?

Bernardo Guimaraes

Review of Economic Dynamics, 2011, vol. 14, issue 4, 553-576

Abstract: This paper analyses a small open economy that wants to borrow from abroad, cannot commit to repay debt but faces costs if it decides to default. The model generates analytical expressions for the impact of shocks on the incentive compatible level of debt. Debt reduction generated by severe output shocks is no more than a couple of percentage points. In contrast, shocks to world interest rates can substantially affect the incentive compatible level of debt. (Copyright: Elsevier)

Keywords: Sovereign debt; Default; World interest rates; Output shocks (search for similar items in EconPapers)
JEL-codes: F34 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (27)

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DOI: 10.1016/j.red.2010.10.002

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