Maturity, Indebtedness, and Default Risk

74 Pages Posted: 29 Apr 2010

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Burcu Eyigungor

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: April 10, 2010

Abstract

In this paper, the authors present a new approach to incorporating long-term debt into equilibrium models of unsecured debt and default. They make three sets of contributions. First, the authors advance the theory of sovereign debt begun in Eaton and Gersovitz (1981) by proving the existence of an equilibrium price function with the property that the interest rate on debt is increasing in the amount borrowed. Second, using Argentina as a test case, they show that unlike a one-period debt model, their model of long-term debt is capable of accounting for the average external debt-to-output ratio, average spread on external debt, and the standard deviation of spreads for the 1993-2001 period, without any deterioration in the model's ability to account for Argentina's other cyclical facts. Third, the authors propose a new and very accurate method for solving the model.

Suggested Citation

Chatterjee, Satyajit and Eyigungor, Burcu, Maturity, Indebtedness, and Default Risk (April 10, 2010). FRB of Philadelphia Working Paper No. 10-12. Available at SSRN: https://ssrn.com/abstract=1596725 or http://dx.doi.org/10.2139/ssrn.1596725

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Burcu Eyigungor

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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