Defaultable Debt, Interest Rates and the Current Account

41 Pages Posted: 20 Sep 2004 Last revised: 29 Oct 2022

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Gita Gopinath

International Monetary Fund (IMF); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: September 2004

Abstract

World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina's default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to slumps. Our ability to match these facts within the framework of an otherwise standard business cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets.

Suggested Citation

Aguiar, Mark and Gopinath, Gita, Defaultable Debt, Interest Rates and the Current Account (September 2004). NBER Working Paper No. w10731, Available at SSRN: https://ssrn.com/abstract=587945

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Gita Gopinath (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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