Sovereign Default and the Decline in Interest Rates

70 Pages Posted: 8 Sep 2020 Last revised: 3 Jul 2023

See all articles by Max Miller

Max Miller

Harvard Business School, Finance Unit

James D. Paron

University of Pennsylvania - Finance Department

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

Date Written: June 13, 2023

Abstract

Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk, which we argue is more consistent with the long-run nature of the interest-rate decline. 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 coinciding with the binding zero lower bound.

Suggested Citation

Miller, Max and Paron, James and Wachter, Jessica A., Sovereign Default and the Decline in Interest Rates (June 13, 2023). 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

Harvard Business School, Finance Unit ( email )

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Boston, MA 02163
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HOME PAGE: http://www.max-miller.finance

James Paron

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
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2892590613 (Phone)
19104 (Fax)

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

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

National Bureau of Economic Research (NBER)

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United States

Securities and Exchange Commission ( email )

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