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Title:
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Sovereign default: the role of expectations
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Author:
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Ayres, João; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
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Abstract:
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In the standard model of sovereign default, as in Aguiar and Gopinath (2006) or Arellano (2008), default is driven by fundamentals alone. There is no independent role for expectations. We show that small variations of that model are consistent with multiple interest rate equilibria. Some of those equilibria correspond to the ones identified by Calvo (1988), where default is likely because rates are high, and rates are high because default is likely. The model is used to simulate equilibrium movements in sovereign bond spreads that resemble sovereign debt crises. It is also used to discuss lending policies similar to the ones announced by the European Central Bank in 2012. |
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Abstract:
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The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396. |
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Subject(s):
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-Sovereign default
-Interest rate spreads
-Multiple equilibria |
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Rights:
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This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
https://creativecommons.org/licenses/by/4.0/
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Document type:
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Working Paper |
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Share:
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