Self-Fulfilling Debt Crises with Long Stagnations

RePEc Short ID: pay93
ORCID iD: 0000-0002-1231-6323

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

doi:10.17016/IFDP.2023.1370

Working Paper

Self-Fulfilling Debt Crises with Long Stagnations

Abstract: We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the Southern European crisis of the early 2010’s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Key for multiplicity is an output process featuring long periods of either high growth or stagnation that we estimate using data for those countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they only occur during stagnations. Expectations are a major driver explaining default rates and credit spread differences between Spain and Argentina.

Keywords: Self-fulfilling debt crises; Sovereign default; Multiplicity; Stagnations;

JEL Classification: E44; F34;

https://doi.org/10.17016/IFDP.2023.1370