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Partial Default

Cristina Arellano, Xavier Mateos-Planas () and José-Víctor Ríos-Rull ()

No 589, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: In the data sovereign default is always partial and varies in its duration. Debt levels during default episodes initially increase and do not experience reductions upon resolution. This paper presents a theory of sovereign default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds as the sovereign chooses its intensity and duration. Partial default is also costly because it amplifies debt crises as the defaulted debt accumulates and interest rate spreads increase. This theory is capable of rationalizing the large heterogeneity in partial default, its comovements with spreads, debt levels, and output, and the dynamics of debt during default episodes. In our theory, as in the data, debt grows during default episodes, and large defaults are longer, and associated with higher interest rate spreads, higher debt levels, and deeper recessions.

Keywords: Emerging markets; Default episodes; Debt restructuring; Debt crises; Sovereign risk (search for similar items in EconPapers)
JEL-codes: F34 G01 H63 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-07-09
New Economics Papers: this item is included in nep-dge, nep-ore and nep-rmg
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Related works:
Working Paper: Partial Default (2019) Downloads
Working Paper: Partial Default (2019) Downloads
Working Paper: Partial Default (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:589

DOI: 10.21034/sr.589

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