On Sovereign Default With Time-Varying Interest Rates

27 Pages Posted: 4 Jun 2020 Last revised: 29 Oct 2021

See all articles by Gaetano Bloise

Gaetano Bloise

University of Rome Tor Vergata - Department of Economics and Finance

Yiannis Vailakis

University of Glasgow

Date Written: April 25, 2020

Abstract

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

Bloise, Gaetano and Vailakis, Yiannis, On Sovereign Default With Time-Varying Interest Rates (April 25, 2020). Review of Economic Dynamics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3585667 or http://dx.doi.org/10.2139/ssrn.3585667

Gaetano Bloise (Contact Author)

University of Rome Tor Vergata - Department of Economics and Finance

Via Columbia 2
Rome, Rome 00123
Italy

Yiannis Vailakis

University of Glasgow ( email )

University Avenue
Glasgow, Scotland G12 8QQ
United Kingdom

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