Sovereign Default and the Decline in Interest Rates

66 Pages Posted: 8 Sep 2020 Last revised: 1 Feb 2021

See all articles by Max Miller

Max Miller

University of Pennsylvania, The Wharton School, Finance Department

James D. Paron

University of Pennsylvania - Finance Department

Jessica A. Wachter

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

Date Written: September 3, 2020

Abstract

Sovereign debt yields have declined dramatically over the last half-century. Standard explanations for this decline, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence across asset classes. We propose instead that the decline in inflation and default risk caused falling interest rates, a phenomenon that is not unique to our century. We show that a model with investment, inventory storage, and sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the recent reduction in investment and output growth corresponding to the zero lower bound.

Suggested Citation

Miller, Max and Paron, James and Wachter, Jessica A., Sovereign Default and the Decline in Interest Rates (September 3, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3641568 or http://dx.doi.org/10.2139/ssrn.3641568

Max Miller

University of Pennsylvania, The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

James Paron

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
2892590613 (Phone)
19104 (Fax)

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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