Working Paper: CEPR ID: DP12750
Authors: Joo Ayres; Gaston Navarro; Juan Pablo Nicolini; Pedro Teles
Abstract: In the standard model of sovereign default, as in Aguiar and Gopinath (2006) orArellano (2008), default is driven by fundamentals alone. There is no independentrole for expectations. We show that small variations of that model are consistentwith multiple interest rate equilibria, similar to the ones found in Calvo (1988). Fordistributions of output that are commonly used in the literature, the high interestrate equilibria have properties that make them fragile. Once output is drawn froma distribution with both good and bad times, however, it is possible to have robusthigh interest rate equilibria.
Keywords: Sovereign Default; Multiple Equilibria; Good and Bad Times
JEL Codes: E44; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high interest rates (E43) | high default probabilities (G33) |
| high default probabilities (G33) | high interest rates (E43) |
| variations in expectations (D84) | different interest rate outcomes (E43) |
| output drawn from bimodal distributions (C46) | robust equilibria (C62) |
| high interest rate equilibria (D53) | fragile equilibria (D50) |
| timing of moves by creditors and borrowers (G21) | stability of equilibria (C62) |