We show that cross-country differences in the underlying volatility and persistence of macroeconomic shocks help explain two historical regularities in sovereign borrowing: the existence of "vicious" circles of borrowing-and-default ("default traps"), as well as the fact that recalcitrant...

The recent Eurozone debt crisis has witnessed sharp decouplings in cross-country bond yields without commensurate shifts in relative fundamentals. We rationalize this phenomenon in a model wherein countries with different fundamentals are on different equilibrium paths all along, but which...

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...

We show how vicious circles in countries’ credit histories arise in a model where output persistence is coupled with asymmetric information between borrowers and lenders about the nature of output shocks. In such an environment, default creates a pessimistic outlook about the borrower’s...

A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign...

A striking feature of sovereign lending is that many countries with moderate debt-to-income ratios systematically face higher spreads and more stringent borrowing constraints than others with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign...

A striking feature of sovereign lending is that many countries with moderate debtto-income ratios systematically face higher spreads and more stringent borrowing constraints than other countries with far higher debt ratios. Earlier research has rationalized the phenomenon in terms of sovereign...