International Finance Discussion Papers (IFDP)
February 2023
Self-Fulfilling Debt Crises with Long Stagnations
Joao Ayres, Gaston Navarro, Juan Pablo Nicolini, and Pedro Teles
Abstract:
We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the Southern European crisis of the early 2010’s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Key for multiplicity is an output process featuring long periods of either high growth or stagnation that we estimate using data for those countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they only occur during stagnations. Expectations are a major driver explaining default rates and credit spread differences between Spain and Argentina.
Keywords: Self-fulfilling debt crises, sovereign default, multiplicity, stagnations.
DOI: https://doi.org/10.17016/IFDP.2023.1370
PDF: Full Paper
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