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Does Multiplicity of Equilibria Arise in the Eaton-Gersovitz Model of Sovereign Default?

Yasin Onder

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: No, at least for a rich parameter space. A common view within the class of sovereign default models is they are subject to multiple equilibria. This paper quantitatively analyzes such claims by using the model and the extensions of Eaton and Gersovitz (1981); a benchmark sovereign default model for quantitative investigation of endogenous default risks. It is shown that within the confines of a rich parameter space the issue of multiplicity never arises in the model simulations when the government debt has one-period or long-term maturity. This paper also shows that inclusion of renegotiation process for endogenous debt recovery to these models as well as inflation and non-defaultable debt along with non-state contingent defaultable debt do not generate multiplicity. This paper sharpens our understanding of such models and presents that the quantitative implications of the literature following these models are not byproduct of bad equilibrium selection.

Keywords: Sovereign default; Multiple equilibria (search for similar items in EconPapers)
JEL-codes: D71 D78 E58 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cmp, nep-dge and nep-mac
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