DP12750 Sovereign Default: The Role of Expectations
|Author(s):||Ayres, Gaston Navarro, Juan Pablo Nicolini, Pedro Teles|
|Publication Date:||February 2018|
|Keyword(s):||good and bad times, multiple equilibria, sovereign default|
|Programme Areas:||International Macroeconomics and Finance|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12750|
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.