Defaultable debt, interest rates and the current account

Mark Aguiar, Gita Gopinath

Research output: Contribution to journalArticle

189 Scopus citations

Abstract

World capital markets have experienced large scale sovereign defaults on a number of occasions. 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. We highlight the role of the stochastic trend in emerging markets, in an otherwise standard model with endogenous default, to match these facts.

Original languageEnglish (US)
Pages (from-to)64-83
Number of pages20
JournalJournal of International Economics
Volume69
Issue number1 SPEC. ISS.
DOIs
StatePublished - Jun 2006
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Current account
  • Default
  • Interest rates
  • Sovereign debt
  • Stochastic trend

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