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Sovereign Default: The Role of Expectations

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

No 723, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We study a variation of the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), and show that this variation is consistent with multiple interest rate equilibria. Some of those equilibria correspond to the ones identified by Calvo (1988), where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crises. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.

Keywords: Sovereign default; interest rate spreads; Multiple equilibria (search for similar items in EconPapers)
JEL-codes: E44 F34 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-05-14
New Economics Papers: this item is included in nep-cba, nep-dge and nep-eec
References: Add references at CitEc
Citations: View citations in EconPapers (30)

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Related works:
Journal Article: Sovereign default: The role of expectations (2018) Downloads
Working Paper: Sovereign Default: The Role of Expectations (2018) Downloads
Working Paper: Sovereign Default: The Role of Expectations (2015) Downloads
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