Sovereign Default and the Decline in Interest Rates

Max Miller, James D. Paron and Jessica Wachter

No 34021, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk. We show that a model with sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the reduction in investment and output growth. Calibrations of the model post-Covid suggest that sovereign default risk may have returned.

JEL-codes: E31 E43 G12 (search for similar items in EconPapers)
Date: 2025-07
Note: AP EFG
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