Sovereign Default Intensity and Noise Bargaining

Grey Gordon and Pablo Guerron

No 1100, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: Hard sovereign defaults—defaults with large haircuts—are associated with deeper recessions, longer durations, and, as we show, larger devaluations than soft defaults. We rationalize these regularities by developing a single-proposer noise bargaining game and embedding it in a two-sector sovereign default model. Creditors weigh the sovereign’s haircut offers against likely future offers and idiosyncratic valuation shocks. In short-lived recessions, creditors tend to reject large proposed haircuts, anticipating better terms as the economy recovers— endogenously correlating default intensity with adverse outcomes. Two years after default, our decomposition attributes nearly 80% of the observed output differentials to selection on different shock realizations.

Keywords: Default; Sovereign; Debt; Growth; Haircuts (search for similar items in EconPapers)
JEL-codes: C78 E32 F34 (search for similar items in EconPapers)
Date: 2023-11-01
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Working Paper: Sovereign default intensity and noise bargaining (2025)
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