Self-Fulfilling Debt Crises with Long Stagnations

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

No 757, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: We explore quantitatively the possibility of multiple equilibria in a model of sovereign debt crises. The source of multiplicity is the one identified by Calvo (1988). This type of multiplicity has been at the heart of the policy debate through the recent European sovereign debt crisis. Key for multiplicity in the model is a stochastic process for output featuring long periods of either high or low growth. We calibrate the output process in the model using data for the southern European countries that were exposed to the debt crisis. We find that expectations-driven sovereign debt crises are empirically plausible, but only in periods of stagnation. Multiplicity is state dependent: in periods of stagnation and for intermediate levels of debt, interest rates may be high for reasons unrelated to fundamentals.

Keywords: Self-fulfilling debt crises; Sovereign default; Multiplicity; Good and bad times; Stagnation (search for similar items in EconPapers)
JEL-codes: E44 F34 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2019-04-18
New Economics Papers: this item is included in nep-eec, nep-mac and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Self-Fulfilling Debt Crises with Long Stagnations (2024)
Working Paper: Self-Fulfilling Debt Crises with Long Stagnations (2023)
Working Paper: Self-Fulfilling Debt Crises with Long Stagnations (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:757

DOI: 10.21034/wp.757

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