On Sovereign Default With Time-Varying Interest Rates
27 Pages Posted: 4 Jun 2020 Last revised: 29 Oct 2021
Date Written: April 25, 2020
We extend and refine Aguiar and Amador (2019)’s contraction approach to Eaton and Gersovitz (1981)’s sovereign debt model. In particular, we encompass time-varying interest rates and growth. We show that, when long-term interest rates exceed growth, equilibrium is unique and can be computed via contraction mapping. The method unifies separate branches of literature, showing that the contraction property is the reflection of previous arbitrage arguments based on replication, inspired by Bulow and Rogoff (1989).
Keywords: Sovereign Default; Time-Varying Interest Rates; Uniqueness of Equilibrium; Contraction Mapping
JEL Classification: F34; F41
Suggested Citation: Suggested Citation