Persistent gaps and default traps
We show how vicious circles in countries' credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks. In such an environment, default signals the borrower's vulnerability to adverse shocks and creates a pessimistic growth outlook. This translates into higher interest spreads and debt servicing costs relative to income, raising the cost of future repayments, thereby creating "default traps". We build a long and broad cross-country dataset to show the existence of a history-dependent "default premium" and of significant effects of output persistence on sovereign creditworthiness, consistent with the model's predictions.
Year of publication: |
2009
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Authors: | Catão, Luis A.V. ; Fostel, Ana ; Kapur, Sandeep |
Published in: |
Journal of Development Economics. - Elsevier, ISSN 0304-3878. - Vol. 89.2009, 2, p. 271-284
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Publisher: |
Elsevier |
Keywords: | Sovereign Debt Serial default Default premium Emerging market bond spreads Asymmetric information Output persistence |
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