The Domestic Debt Intolerance and Bad Equilibrium: An Empirical Default Model

Ata Özkaya

No 13-1, GIAM Working Papers from Galatasaray University Economic Research Center

Abstract: The Turkish financial crises 1994 and 2000-2001 are spaced some years apart, creating an illusion that this time is different among policymakers and investors. Suppose that the dynamics of the macroeconomy generates multiple values for the domestic interest rate premium : "low" and "high". The sudden shifts in financial markets that characterize financial crises are then interpreted as a shift from one equilibrium to another. In this paper, we specify a dynamic model in which debt default through inflation is possible, determine its closed-form solution and multiple equilibria. We estimate the model using the properties of chaos theory, against post-liberalization period (1989-2010) data for Turkey. The problem takes as given our model economy with multiple equilibria and asks whether the multiple equilibria can be verified by the data. To make progress on this problem we introduce phase-space portrait of the considered economy and identify path for debt dynamics moving from low and diverging through high interest levels. Second, we measure how the default episodes 1994 and 2000-2001 converge/diverge apart on phase-space, depending on the maximal Lyapunov exponent. Since the data show support for the multiple-equilibrium explanation of the serial defaults, we better understand the significance of domestic debt behind the high inflation, banking crises and currency crashes that Turkish economy frequently experienced in its postliberalization period.

Keywords: Defaults; Multiple equilibria; Phase-space; Lyapunov exponent; Interest rates; Turkish financial crises (search for similar items in EconPapers)
JEL-codes: C65 D84 E43 H63 O52 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2013-02-04
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://giam.gsu.edu.tr/wp-content/uploads/2014/07/WP-13-01.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:giamwp:2013_001

Access Statistics for this paper

More papers in GIAM Working Papers from Galatasaray University Economic Research Center Contact information at EDIRC.
Bibliographic data for series maintained by Renginar Senses Dayangac ().