Defaultable Debt, Interest Rates, and the Current Account

46 Pages Posted: 13 Jan 2005

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Gita Gopinath

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 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 than in 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.

JEL Classification: F32, F34, F37, G15

Suggested Citation

Aguiar, Mark and Gopinath, Gita, Defaultable Debt, Interest Rates, and the Current Account (August 2004). FRB of Boston Working Paper No. 04-5. Available at SSRN: https://ssrn.com/abstract=648047 or http://dx.doi.org/10.2139/ssrn.648047

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Gita Gopinath

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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