Sovereign default: The role of expectations
Copyright policy )Sovereign default: The role of expectations
In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria, similar to the ones found in Calvo (1988). For distributions of output that are commonly used in the literature, the high interest rate equilibria have properties that make them fragile. Once output is drawn from a distribution with both good and bad times, however, it is possible to have robust high interest rate equilibria. The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
- Federal Reserve Bank of Minneapolis United States
- Federal Reserve System United States
- Autonomous University of Barcelona Spain
- Center for Economic and Policy Research United States
- Universidade Católica Portuguesa Portugal
sovereign default, Multiple equilibria, Sovereign default, Macroeconomic theory (monetary models, models of taxation), multiple equilibria, Interest rate spreads, good and bad times, Good and bad times, Sovereign default; Interest rate spreads; Multiple equilibria, jel: jel:E44, jel: jel:F34
sovereign default, Multiple equilibria, Sovereign default, Macroeconomic theory (monetary models, models of taxation), multiple equilibria, Interest rate spreads, good and bad times, Good and bad times, Sovereign default; Interest rate spreads; Multiple equilibria, jel: jel:E44, jel: jel:F34
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