Dynamics of Investment, Debt, and Default

36 Pages Posted: 13 May 2013

See all articles by Grey Gordon

Grey Gordon

Federal Reserve Banks - Federal Reserve Bank of Richmond

Pablo Guerrón-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: May 8, 2013

Abstract

How does physical capital accumulation affect the decision to default in developing small open economies? We find that, conditional on a level of foreign indebtedness, more capital improves the sovereign’s ability to meet its obligations, reducing the likelihood of default and the risk premium. This effect, however, is diminishing in the stock of capital because capital also tames the severity of the contraction following default, making autarky more appealing. Access to long-term debt and costly capital adjustment are crucial for matching business cycles. Our quantitative model delivers default episodes that mimic those observed in the data.

Keywords: Investment, Debt, Default, Long-Term Debt

Suggested Citation

Gordon, Grey and Guerron-Quintana, Pablo, Dynamics of Investment, Debt, and Default (May 8, 2013). FRB of Philadelphia Working Paper No. 13-18, Available at SSRN: https://ssrn.com/abstract=2264311 or http://dx.doi.org/10.2139/ssrn.2264311

Grey Gordon (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Pablo Guerron-Quintana

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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