Quantitative Models of Sovereign Debt Crises

67 Pages Posted: 15 Mar 2016 Last revised: 18 Mar 2016

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Zachary Stangebye

University of Notre Dame

Multiple version iconThere are 2 versions of this paper

Date Written: March 11, 2016

Abstract

This chapter is on quantitative models of sovereign debt crises in emerging market economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multi-period debt, (v) a default penalty that includes both a reputation loss and a physical output loss and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research.

Keywords: debt crises, sovereign debt, default, spreads, self-fulfilling debt crises

JEL Classification: F34, G15

Suggested Citation

Aguiar, Mark and Chatterjee, Satyajit and Cole, Harold L. and Stangebye, Zachary, Quantitative Models of Sovereign Debt Crises (March 11, 2016). Available at SSRN: https://ssrn.com/abstract=2746808 or http://dx.doi.org/10.2139/ssrn.2746808

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

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

Harold L. Cole (Contact Author)

University of Pennsylvania - Department of Economics ( email )

3718 Locust Walk
436 McNeil
Philadelphia, PA 19104
United States
215-898-7788 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zachary Stangebye

University of Notre Dame ( email )

Notre Dame, IN 46556
United States
5746311054 (Phone)

HOME PAGE: http://www.zachstangebye.com

Register to save articles to
your library

Register

Paper statistics

Downloads
108
Abstract Views
673
rank
241,207
PlumX Metrics