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Sovereign Default: The Role of Expectations

Joao Ayres (), Gaston Navarro, Juan Pablo Nicolini () and Pedro Teles ()

No 12750, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria, similar to the ones found in Calvo (1988). For distributions of output that are commonly used in the literature, the high interest rate equilibria have properties that make them fragile. Once output is drawn from a distribution with both good and bad times, however, it is possible to have robust high interest rate equilibria.

Keywords: good and bad times; multiple equilibria; sovereign default (search for similar items in EconPapers)
JEL-codes: E44 F34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
Date: 2018-02
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Journal Article: Sovereign default: The role of expectations (2018) Downloads
Working Paper: Sovereign Default: The Role of Expectations (2015) Downloads
Working Paper: Sovereign Default: The Role of Expectations (2015) Downloads
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