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
JEL(s): F3
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.