Working Paper: NBER ID: w20896
Authors: Yan Bai; Seon Tae Kim; Gabriel P. Mihalache
Abstract: This paper studies the maturity and stream of payments of sovereign debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shortened maturity but back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. During recessions, the country prefers its payments to be more back-loaded—delaying relatively larger payments—to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedule, as an optimal trade-off between consumption smoothing and endogenous borrowing cost.
Keywords: No keywords provided
JEL Codes: E62; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| payment growth rate (O42) | output (C67) |
| output (C67) | payment growth rate (O42) |
| spreads (Y60) | payment growth rate (O42) |
| spreads (Y60) | maturity (D25) |
| output (C67) | maturity (D25) |
| payment growth rate (O42) | maturity (D25) |
| economic conditions (E66) | payment growth rate (O42) |
| economic conditions (E66) | maturity (D25) |