Quantitative Sovereign Default Models and the European Debt Crisis — by Luigi Bocola, Gideon Bornstein, Alessandro Dovis
Quantitative Sovereign Default Models and the European Debt Crisis
NBER Working Paper No. 24981
Issued in August 2018
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, Monetary Economics
A large literature has developed quantitative versions of the Eaton and Gersovitz (1981) model to analyze default episodes on external debt. In this paper, we study whether the same framework can be applied to the analysis of debt crises in which domestic public debt plays a prominent role. We consider a model where a government can issue debt to both domestic and foreign investors, and we derive conditions under which their sum is the relevant state variable for default incentives. We then apply our framework to the European debt crisis. We show that matching the cyclicality of public debt —rather than that of external debt— allows the model to better capture the empirical distribution of interest rate spreads and gives rise to more realistic crises dynamics.
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Machine-readable bibliographic record –
Document Object Identifier (DOI): 10.3386/w24981
PublishFinancevia National Bureau of Economic Research Working Papers https://ift.tt/1j89DVYSeptember 3, 2018 at 03:32PM https://ift.tt/1aNsfVT https://ift.tt/1j89DVY https://ift.tt/2oAQBBV