DP3541 A Brazilian Debt-Crisis Model
|Author(s):||Assaf Razin, Efraim Sadka|
|Publication Date:||September 2002|
|Keyword(s):||costly-state verification, debt crisis, multiple self-fulfilling-expectations equilibria|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=3541|
We develop a stylised model of multiple equilibria, with country risk spreads at the focus of the analysis. Fears that the country default on its debt triggers a reversal in the direction of inflows of international financial capital raise interest-rate spreads and thus the cost of servicing the public debt. The analytical framework is standard: creditors observe the output of borrowing only at a cost.