Quantitative Models of Sovereign Debt Crises

M. Aguiar, S. Chatterjee, H. Cole, Z. Stangebye

Research output: Chapter in Book/Report/Conference proceedingChapter

11 Scopus citations

Abstract

This chapter is on quantitative models of sovereign debt crises in emerging economies. We interpret debt crises broadly to cover all of the major problems a country can experience while trying to issue new debt, including default, sharp increases in the spread and failed auctions. We examine the spreads on sovereign debt of 20 emerging market economies since 1993 and document the extent to which fluctuations in spreads are driven by country-specific fundamentals, common latent factors and observed global factors. Our findings motivate quantitative models of debt and default with the following features: (i) trend stationary or stochastic growth, (ii) risk averse competitive lenders, (iii) a strategic repayment/borrowing decision, (iv) multiperiod debt, (v) a default penalty that includes both a reputation loss and a physical output loss, and (vi) rollover defaults. For the quantitative evaluation of the model, we focus on Mexico and carefully discuss the successes and weaknesses of various versions of the model. We close with some thoughts on useful directions for future research.

Original languageEnglish (US)
Title of host publicationHandbook of Macroeconomics, 2016
EditorsJohn B. Taylor, Harald Uhlig
PublisherElsevier B.V.
Pages1697-1755
Number of pages59
ISBN (Print)9780444594877
DOIs
StatePublished - Jan 1 2016

Publication series

NameHandbook of Macroeconomics
Volume2
ISSN (Print)1574-0048

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)

Keywords

  • Capital flows
  • Debt sustainability
  • Default risk
  • Emerging markets
  • Quantitative models
  • Risk premia
  • Rollover crises
  • Stochastic trend

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  • Cite this

    Aguiar, M., Chatterjee, S., Cole, H., & Stangebye, Z. (2016). Quantitative Models of Sovereign Debt Crises. In J. B. Taylor, & H. Uhlig (Eds.), Handbook of Macroeconomics, 2016 (pp. 1697-1755). (Handbook of Macroeconomics; Vol. 2). Elsevier B.V.. https://doi.org/10.1016/bs.hesmac.2016.04.005