Sovereign Default: The Role of Expectations

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

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

Working Paper

Sovereign Default: The Role of Expectations

Abstract: We study a variation of the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), and show that this variation is consistent with multiple interest rate equilibria. Some of those equilibria correspond to the ones identified by Calvo (1988), where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crises. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012.

Keywords: Sovereign default; interest rate spreads; Multiple equilibria;

JEL Classification: E44; F34;